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Market Extra: Inflation retreat puts world’s biggest bond ETFs on pace for a blowout quarter


Major U.S. bond exchange-traded funds rallied on Tuesday after inflation data indicated that the Federal Reserve has made more headway in its fight to tame high inflation.

Shares of the massive $85.5 billion Vanguard Total Bond Market ETF

jumped 0.9% Tuesday, putting it on pace to match its best day of gains since Dec. 7, according to FactSet data.

At the intraday peak, shares rose 1%, which would have been its best daily advance in about a month.

Shares of the $82.9 billion iShares Core U.S. Aggregate Bond ETF

were up also up 0.8% at last check, heading for its best day since in about a week.

Like equities, bond funds have been hard hit this year, along with the underlying assets they trace, as the Fed has rapidly jacked up interest rates to pull inflation down from painful levels last seen in the 1980s. ETFs in recent years have become a popular way for individuals to gain exposure to bonds.

The pair of ETFs track a cross-section of highly rated U.S. bonds, giving individuals exposure to Treasurys, mortgage securities issued by giants Freddie Mac

and Fannie Mae
as wells as corporate debt of major American banks, according to FactSet data.

Shares of the AGG ETF were off about 12.7% on the year so far, according to FactSet, while those of BND were roughly 13% lower for the same stretch.

The Fed is widely expected to raise interest rates by another 50 basis points on Wednesday. It now also appears to be making more progress on inflation this fall, after a series of jumbo rate hike lifted its policy rate to a 3.75%-4% range, the highest in 15 years.

The rate of consumer inflation fell to 7.1% in November, from 7.7% a month before, but sharply down from a pandemic peak of 9.1% in June. The Fed, however, has committed to bringing inflation down to its 2% annual target, even if triggers pain for businesses and households.

High inflation erodes the value of bonds, which in the past decade have been producing low yields. Stabilizing rates, at today’s higher bond yields, might finally provide bond investors some relief.

The benchmark 10-year Treasury rate

was pegged at 3.49% on Tuesday, while stocks gave back some earlier gains, leaving the Dow Jones Industrial Average

struggling for direction, after it gave back about 700 points from peak intraday levels. The S&P 500 index

was up 0.4%, according to FactSet.

Read: 5 things to watch when the Fed makes its interest-rate decision

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