Downward pressure on bond prices from high interest rates is starting to ease. This opens opportunities for institutional investors to return to bonds again. Long-term bonds, in particular, are starting to see more allocations from institutional money again.
2022’s sell-off in both equities and bonds was followed by a stock market rally near the end of 2023, but bonds were kept in check thanks to high interest rates translating to high yields. However, signs of a cooling economy are starting to boost bets on rate cuts that may potentially happen later this year and thus, more fund managers are adding long-term bonds.
Before cuts happen, a rally can actually take place months ahead. If that’s the case, investors may want to position themselves ahead of the move by allocating to bond funds now.
“History shows pretty consistently that yields rally hard starting three to four months before the Fed actually starts cutting,” said Gershon Distenfeld at AllianceBernstein Holding LP, in a Yahoo Finance news report.
Vanguard has three funds for getting exposure to long-term bonds. For generalized exposure, consider the Vanguard Long-Term Bond ETF (BLV). It seeks to track the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index. It includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds with maturities of greater than 10 years and that are publicly issued.
Investors wishing to stay within the safe confines of U.S. Treasury debt, then the Vanguard Long-Term Treasury ETF (VGLT) is the fund to consider. It tracks the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. VGLT employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Long Treasury Bond Index. That index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities greater than 10 years.
Going Long on Corporates
Corporate bonds have also come back into favor. They offer yield as well as improved credit quality amid the prospect of rate cuts. Rate cuts can allow corporations to reduce their debt service costs by refinancing to lower rates and boost the bottom line.
“Long-dated corporate bonds are winning back investors who fled as the market dialed back bets on imminent easing by the Federal Reserve,” the aforementioned Yahoo Finance report said. “Now, the allure is returning as markets price in two rate cuts this year after data showed US inflation ebbing for the first time in six months.”
Fixed income investors looking to add long-term corporate bonds will want to look at the Vanguard Long-Term Corporate Bond ETF (VCLT). The ETF tracks the performance of the Bloomberg U.S. 10+ Year Corporate Bond Index. It includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities greater than 10 years.
For more news, information, and analysis, visit the Fixed Income Channel.