Bond ETFs for the Coming Consumer Correction

Last week we got the continuing unemployment claims numbers. Continuing claims were down to 17.3 million from the prior week’s level of 18.1 million. That’s better, but over 18 million folks are on unemployment benefits. And that is a whole lot of households in financial distress.

One big help is the weekly additional unemployment payment of $600 from the U.S. Treasury, but the Treasury’s additional $600 weekly payments will end in August, and that may well be bad news not just for unemployed households but for the U.S. consumer economy.

Data from the U.S. Census and Treasury show that for the trailing months when benefits were paid, those that were unemployed increased household spending by 10%. But employed household spending dipped. This suggests that consumption may drop in August and beyond.

This comes as paused unlocking or partial re-locking is hitting state and local markets with surging COVID-19 cases. This means fewer outlets for spending and an increase in layoffs complete with at least a partial re-expansion of remote work and stay at home practices around the nation.

The administration is working on getting either an extension or an adaptation of the Treasury payments both in weekly benefits as well as potentially another round of one-off checks. But it would need Congress to go along. It will be reconvening next week after its summer break.

Without another relief package from the U.S. Treasury, the resulting hit to the consumer sector of the U.S. economy will mean some bad market news and a pullback in general stocks.

S&P 500 Index with Fibonacci Retracements & Moving Averages — Source: Bloomberg Finance, L.P.

From late May to date, the S&P 500 has been in a range as traders and investors take a step back from looking past the current mess and focus on what’s still challenging for the economy.

This is a good time to buy some more bonds.

Bond Buys for Right Now

Bonds have been very good performers with all of the recovery work by the Federal Reserve as well as the continued demand for U.S. bonds both inside and outside the US.

SPDR Nuveen Bloomberg Barclays Municipal Bond (TFI) & Vanguard Intermediate-Term Corporate Bond ETF (VCIT) Total Returns — Source: Bloomberg Finance, L.P.

Quality U.S. corporate bonds and municipal bonds remain in strong demand, and even with some new issuance, buyers have been pulling them into their portfolios by the truckload. And with no inflation in the US, corporate and municipal bonds provide better real yields than U.S. Treasuries, since much of the Treasury yield curve is negative in inflation adjusted yield (real yield).

And with Fed support for bond prices and market demand, bonds will remain a safe haven for some time.

On the corporate bond front, I like the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT). Yielding around 2%, it’s one of the simplest ways to own quality U.S. corporate bonds. The ETF has returned over 20% since March 19 to date.

For municipal bonds, I like the SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSEARCA:TFI). Also yielding a tax-advantaged rate of around 2%, this ETF provides a great way to capitalize on income now and defensive gains to come. It has returned about 18% since March 19 to date.

Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.

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