The question of whether the economy is in a recession or not, a forthcoming presidential election, and interest rates add to the high level of uncertainty in the current market. As such, fixed income investors may want to take a middle-ground approach with bonds and opt for debt with intermediate maturity dates.
With looming rate cuts ahead, it’s not certain how aggressive the Federal Reserve will be. A growing economy could mean a slow and steady accommodative monetary policy if data shows that the economy is still running hot.
“If we do get stronger growth than is expected, there’s some risk in being too far out on the duration curve,” said Carol Schleif, chief investment officer of the BMO Family Office, via a Morningstar report. She noted that long-term economic expectations can impact long-term rates versus short-term.
“It’s the proverbial bullwhip effect,” Schleif added, recommending that investors stay in short-term debt to limit volatility and maintain high yields.
Investors can also opt for a balance between short- and long-term debt with intermediate bonds. Following the yield-curve’s inversion in 2022, it’s starting to normalize again, which could see a more pronounced move into intermediate bonds.
“As the curve steepens out, people are going to be moving into intermediate fixed income," said David Rogal, portfolio manager at BlackRock’s Fundamental Fixed Income Group.
For broad-based exposure, consider using the Vanguard Intermediate-Term Bond ETF (BIV ). The fund tracks the Bloomberg U.S. 5–10 Year Government/Credit Float Adjusted Index. That is a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of five to 10 years.
Corporate Bonds and Treasury Options
Investors wanting to attain more yield can opt for using corporate bonds if they’re willing to accept the higher degree of credit risk. That said, consider using the Vanguard Intermediate-Term Corporate Bond ETF (VCIT ). The fund seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity. Intermediate exposure means that, like BIV, VCIT primarily focuses on high-quality corporate bonds with maturity dates that fall between five to 10 years.
Because of market uncertainty, Treasury notes are always a prime option for the more risk-averse investors. To stay within the safe confines of U.S. government debt, consider the Vanguard Intermediate-Term Treasury ETF (VGIT ). The fund focuses on Treasury notes that fall within that five- to 10-year maturity-date window.
For more news, information, and analysis, visit the Fixed Income Channel.
