Bullish Bets on Bonds Persist Despite Fed-Speak

Cooling prices during the month of May are fueling bullish bets on bonds despite the latest Fed-speak to tamp down any notions of successive rate cuts at a rapid cadence. In the meantime, it could be an opportune time to take advantage of core bond exposure now before a potential rally.

Bond traders are already ramping up bets on rate cuts, loading "back up on interest-rate-cut bets — and even the pushback coming out of the Federal Reserve did little to shake their conviction" Bloomberg reported.

As the report mentioned, the Fed remained measured when discussing their interest rate strategy for the rest of the year. It did acknowledge that data points to signs of cooling inflation and reaching closer to the 2% target inflation rate, but reiterated the relatively high rate environment.

“Inflation has eased over the past year but remains elevated,” the Fed's post-meeting statement said. “In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.”

The anticipation of rate cuts could allow investors to take advantage of bond prices now before eventual rate cuts take place. To that point, Vanguard has a pair of core bond funds to consider in both passive and active strategies.

2 Ways for Core Bonds Exposure

For passive exposure at a low 0.03% expense ratio, consider the Vanguard Total Bond Market Index Fund ETF Shares (BND). It seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. That index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.

Fixed income investors shouldn't dismiss active funds as expensive, especially the Vanguard Core Bond ETF (VCRB), which comes with a 0.10% expense ratio. For added flexibility in bond markets, active funds can be beneficial especially with regard to market uncertainty. In the case of VCRB, holdings come under the auspices of experienced portfolio managers.

Like BND, VCRB mitigates credit risk via diversified exposure to the U.S. investment-grade bond market. However, the actively managed VCRB also extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities. Again, with the active exposure that VCRB offers, investors can harness the portfolio management capabilities of the Vanguard Fixed Income Group at a low expense ratio.

For more news, information, and analysis, visit the Fixed Income Channel.

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