As the economy cools down and the U.S. Federal Reserve eases into a more accommodative monetary policy, the prospect of a potential recession could push even more investors to bonds. But recession or not, investors can still reap the benefits of core bond exposure.
The rate and pace at which the Fed will institute cuts is another topic of discussion. An economy weakening at a quicker pace than anticipated could mean aggressive cuts, but could also point to signs of a recession. Right now, bond market pundits are at odds over what the current economic data is conveying.
“Proponents of a soft-landing scenario said recent weak U.S. data does not suggest the economy is falling off a cliff and might not even point to recession,” Reuters reported. “Some hard landing believers, on the other hand, cited worrisome trends in the jobs market that could push the economy into a deep downturn and force the Fed to aggressively slash rates.”
“There’s a disconnect between the bond market and the Fed,” said Byron Anderson, head of fixed income at Laffer Tengler Investments. “The market is definitely more bearish than the Fed. But somebody is going to be wrong.”
With market volatility expected to pick up in the midst of a presidential election, it’s an ideal time for core bond exposure. An ideal option is the Vanguard Total Bond Market Index Fund ETF Shares (BND ). The fund is all-encompassing in the bond market, providing exposure to a wide spectrum of public, investment-grade, taxable, fixed income securities, as well as mortgage- and asset-backed securities in the United States. This includes government, corporate, and international-dollar-denominated bonds.
BND is an ideal complement for an equites portfolio as a stand-alone product for bond exposure. For example, the fund can serve as the 40% core bonds in a traditional 60/40 portfolio split.
Core Exposure Via Active Management
For more flexibility in core bond exposure, Vanguard also offers a pair of cost-effective actively managed funds. The Vanguard Core Bond ETF (VCRB ) and the Vanguard Core-Plus Bond ETF (VPLS ) carry 0.10% and 20% expense ratios, respectively.
Active management allows both funds to access the knowledge of experienced portfolio managers from the Vanguard Fixed Income Group. They can adjust holdings based on current market conditions, allowing for flexibility in volatile times as opposed to passive funds.
VCRB focuses on the U.S. investment-grade bond market. In addition to U.S. Treasuries, the fund extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities.
For those seeking more yield while still maintaining investment-grade quality will want to consider VPLS. The ETF adds exposure to riskier credit profiles such as emerging market debt. Nonetheless, its active strategy can help temper said risk.
For more news, information, and analysis, visit the Fixed Income Channel.
