Inflation fears may have dissipated in July, but the recession narrative is gaining momentum. Thus, investors are once again focusing on bonds as a safe haven if economic growth suffers from rising interest rates.
To start the first half of the year, stocks and bonds faltered amid inflation fears, but inflation fears could diverge into further upside as early trends wane. Too much optimism could be mounted in what could be nothing more than a bearish rally.
“What we’ve seen at this point is a bear market rally and we don’t want to chase it,” Wei Li, chief global investment strategist at BlackRock Inc, said in a Bloomberg article. “I don’t think we’re off the hook with a month of cooling inflation. Bets on a dovish Fed pivot are premature and earnings do not reflect the real risk of a US recession next year.
Bond exposure is available with active exchange-traded funds (ETFs) that provide investors with dynamic flexibility in the bond markets. One option to consider for corporate bonds is the American Century Diversified Corporate Bonds ETFs (CORP )which offers high quality debt securities.
The fund seeks current income with an emphasis on higher quality debt while aggressively allocating a portion of the portfolio to high yield. Through its product website, CORP creates a systematically managed portfolio that incorporates fundamental and quantitative expertise that:
- Adjusts investment grade and high yield components to balance interest rate and credit risk.
- Screens individual credits to look for those with strong fundamentals, reduced default risk, attractive valuations and liquidity.
- Adjusts sector and duration exposures as risks and opportunities emerge.
Municipal bonds are also another option, providing investors with fixed income free of federal taxes. Also using an active management strategy, a fund to consider is the American Century Diversified Municipal Bond ETFs (TAXF ).
The fund seeks to provide consistent tax-free income by employing an active research-driven process that taps into the universe of municipal bonds and adjusts exposure to prevailing market conditions. As with local government bonds in the United States, credit risk is minimized, with nearly 80% of the fund comprised of debt securities rated at AAA to A (as of May 31).
Both funds also have a low expense ratio of 29 basis points. This should appeal to cost-conscious investors who may generally find actively managed funds too expensive to consider.
For more news, insights, and strategies, visit the Core Strategies channel.