Notable economist touts fixed income and short-term cash

If cash is king, then short-term fixed-income securities can share the throne in the current market uncertainty, according to renowned economist Mohamed El-Erian.

Stocks and bonds had fallen together before a summer rally raised hopes that things could potentially turn around. However, inflation fears are giving way to recession fears as the US Federal Reserve seeks to step up the aggressiveness of its rate hike policy.

So bonds are heading down again as yields start to climb again. As such, rate risk mitigation is essential for potential fixed income investors using short-term debt securities.

“We have to get out of these distorted markets that have created a lot of damage,” said El-Erian, chief economic adviser at Allianz. “We’re reassessing – I don’t think we’re there yet, but we’re definitely getting there.”

2 options for short term fixed income securities

Vanguard has a pair of options to consider when it comes to mitigating interest rate risk through exposure to short-term bonds. For investors who want to stick with safe haven Treasuries, consider the Vanguard Short Term Cash ETF (VGSH).

With a short duration, VGSH is a prime option to consider. This ETF offers exposure to short-term government bonds, focusing on treasury bills that mature in one to three years.

This is an ideal option, given the uncertainty of the current market environment. Bonds can offer investors 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.

Overall, 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 diversity beyond Treasuries, investors can also opt for the Vanguard Short-Term Bond Index Fund ETF Shares (BSV). With more varied holdings, BSV provides additional diversification for a bond portfolio while maintaining a short duration profile.

BSV seeks to track the performance of the Bloomberg US 1–5 Year Government/Credit Float Adjusted Index. This index includes a broad range of bond exposures, including all medium and large issues of US government bonds, investment grade corporates and international investment grade bonds denominated in dollars that have maturities between one and five years and are publicly issued.

BSV strengths:

  • Seeks to track the performance of the Bloomberg US 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of one to five years.
  • Invests in US government bonds, high quality (investment grade) corporate bonds and international investment grade dollar denominated bonds.
  • Follows a passively managed index sampling approach.

For more news, insights and strategy visit the Fixed income channel.

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