BIV - BIV: Concerning Price Action Bearish Seasonals Offset A 2.5% Real Yield

2023-08-18 13:09:42 ET

Summary

• Traders are pricing in a 1-in-3 chance of a quarter-point rate increase by the November Federal Reserve meeting.
• Q3 GDP growth is tracking at over 5%, but the chance of a rate hike at the September FOMC meeting remains modest.
• I reiterate my hold rating on the Vanguard Intermediate-Term Bond Index Fund ETF Shares.
• With shares near key support, I outline important price levels to monitor.

Will they stay or will they go? Recent hot economic data puts pressure on Chair Powell and the rest of the Federal Reserve to perhaps hike its policy rate one more time this year. As it stands, traders have priced in a more than 1-in-3 chance of a final quarter-point rate increase by the November meeting. The chance of a hike at the upcoming September 20 FOMC gathering remains modest, despite a current Atlanta Fed GDPNow gauge that suggests Q3 domestic economic expansion (after inflation) is tracking at a clip north of 5%. Amid the hot data, it's not surprising that bond prices have come under pressure.

I am reiterating my hold rating on the Vanguard Intermediate-Term Bond Index Fund ETF Shares ( BIV ).

Fed Funds Rate Futures Holding Steady

Extremely Strong Q3 GDP Growth Being Modeled

Corporate Credit Spreads Remain Tight

Very Strong Economic Surprises, Pushing Up Yields

According to the issuer , BIV seeks to track the investment return of the Bloomberg U.S. 5-10 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of 5–10 years. The ETF invests in investment-grade debt securities including government, corporate, and international dollar-denominated bonds with maturities between 5–10 years that are rated BBB- or above by S&P.

BIV is a large ETF with assets under management of more than $36 billion, and its expense ratio is low at just four basis points. With a current yield to maturity of 4.6% (as of July 31, 2023), the yield is about where you would expect based on the shape of the Treasury yield curve and with corporate bond credit spreads being modest. Given the steep rise in rates so far in August, in other words, the bond market selloff, the real-time YTM is likely closer to 4.9%. The fund is highly liquid and an ideal holding for long-term investors seeking a diversified portfolio of intermediate-term Treasury securities and investment-grade corporate bonds. Its 50-day average volume is more than one million shares, per Vanguard, while its median 30-day bid/ask spread is very tight.

Digging into the portfolio, BIV holds more than 2000 individual securities with an average effective maturity of 7.2 years. Sure, you could get a higher current yield by going short on your duration, but should a recession or an economic growth slip-up happen, then there's a reasonable chance, in my view, that high-quality fixed income will catch a bid. Also, with inflation expectations still reasonable, you can now near a more than 2% real yield in something like BIV. Morningstar notes that BIV's portfolio fits on the upper-middle section of the bond style box, indicating that it is indeed a fund of high quality and medium maturity.

Inflation Expectations Not Surging

As of August 17, per Vanguard, 56.5% of BIV is composed of US government bills, notes, and bonds while the corporate component is actually on the lower end of high-grade quality - nearly 40% of the fund is A or BBB rated.

BIV: Portfolio Breakdown

Seasonally, now is not a great time to enter a long position in BIV, according to data from Equity Clock. A sharp fixed-income rally has historically taken place from mid-March through August, and while that has generally not happened this year, the September through year-end stretch has on average returned a negative figure over the past 15 years.

BIV: Bearish Seasonal Trends

The Technical Take

There are several interesting features on the chart of BIV. Notice in the graph below that shares have put in a bearish rounded top pattern, and there is now key support in the $73 to $74 range. With BIV currently penetrating a gap up from back in November of last year, it presents an intriguing buying point, but a move under $73 would portend a measured move price objective to just under $70 based on the height of the rounded top pattern annotated on the chart below. Moreover, the bulls have their work cut out for them on rally attempts, as a high amount of supply could come onto the market in the $75 to $78 zone.

Encouraging, however, is that BIV's long-term 200-day moving average is now rising, indicating that the bulls are actually in charge of the broader trend. I suspect it will likely dip, though, following the fund's 5-day losing streak it has working.

Overall, the technical view is not strong, and we could revisit the October low from 2022.

BIV: Bearish Rounded Top Following Its October 2022 Low, $73 Key Support

The Bottom Line

Despite the poor chart, I like how BIV now has a nearly 2.5% real yield (its current YTM is less than 5-10 year inflation expectations). Even with volatility and minor more downside, a higher yield today compared to two years ago should help cushion the blow. But with a concerning chart and poor seasonal trends, I reiterate my hold rating for now.

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