Amid Rising Rates, Yields Point to Recession


As if financial markets didn’t have enough to worry about with inflation and geopolitical tensions with Russia and Ukraine, yield curve inversions add an extra dose of anxiety.

“On Wednesday, the bond market watched with peril as the yield on the 10-year US Treasury bond briefly fell below that of the benchmark two-year bond,” wrote Jonathan Shapiro in Financial Review. “This shortly after the 30-year yield fell below the five-year yield for the first time since 2006.

What’s wrong with inverted yield curves? When the benchmark short-term yield is higher than the 10-year yield, it could be an impending sign of a recession.

The bond investor has options to navigate this delicate market. One way is to get a wide exposure or shorten the duration.

Often seen as an ideal safe-haven asset, bonds can help cushion an overly stock-heavy portfolio in a downturn. Whether a portfolio’s equity-bond allocation is 70-30, 60-40, or otherwise, investors can gain broad bond exposure with the Vanguard Total Bond Market Index Fund ETFs Shares (BND A).

BND targets the performance of the Bloomberg US Aggregate Float Adjusted Index, which represents a broad range of quality, taxable, public fixed income securities in the United States, including government, corporate and international bonds denominated in dollars, as well as mortgage securities. -backed and asset-backed securities, all with maturities longer than one year.

As mentioned, bond investors can use BND as a traditional hedging item when the stock market turns bad. Short-term traders can also use the ETFsthanks to its dynamic ability to be bought and sold quickly on the open market due to its liquidity.

With a short focus time, the Vanguard Short Term Cash ETFs (VGSH A) is a first option to consider. This ETFs provides exposure to short-term government bonds, focusing on treasury bills with maturities between one and three years.

This may be an ideal option, given the uncertainty of the current market environment. Bonds can provide investors with a safe haven from stock market volatility, while short-term bonds limit the risks of potential rate hikes that can deprive investors of fixed income opportunities.

Globally, VGSH:

  • Seeks to provide current income with moderate price fluctuation.
  • Invests primarily in high quality US Treasury bonds (investment grade).
  • Maintains a dollar-weighted average maturity of one to three years.

For more news, insights and strategy, visit the Fixed Income Channel.


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