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  • Writer's pictureOwen

Falling Rent Is Cooling Inflation Making VGLT A Buy

Summary


  • Real-time indices of rent show it is cooling more quickly than the Fed's survey which tends to lag reality by up to 4 quarters.

  • The Vanguard Long-Term Treasury ETF invests in U.S. Treasuries with maturities greater than 10 years.

  • This ETF is a hedge for recession risk but also works if you believe that cooling inflation will be combined with a soft landing.

  • Inflation was primarily caused by supply disruptions to traded goods and energy plus a spike in rents, and all three are now cooling.


Introduction


Many previously inflationary forces are now turning deflationary. This means Vanguard Long Term Bond ETF (NASDAQ:VGLT) should partially recover from a poor 2022, being driven primary by inflationary expectations.


The main components of this cooling are:

  • Rents are falling fast with a 0.4% month-on-month decline in November.

  • Transport costs have fallen substantially in the last 6 months.

  • Car gas prices have returned to pre-war levels of around $3 a gallon.


This report will discuss these elements further as well as consider the main risk and also why VGLT is a good portfolio allocation and recession hedge.


We have a price target for VGLT of $78 per share.



Before we consider the deflationary forces at work, let's first be clear as to what the VGLT ETF actually is, as well as the context for long-term bond ETFs.


Intro to the Vanguard Long Term Bond ETF


VGLT holds long term US government treasuries. It tracks a market-weighted Treasury bond index for bonds that are 10+ years. It does this via buying a sample of bonds with a range of maturities and risk profiles to track the index.


VGLT is quite similar to the iShares 20+ Year Treasury Bond ETF (TLT) although smaller. Assets are around USD4bn compared to TLT's USD28bn. VGLT is the lower fee option of 0.04% versus TLT's 0.15% p.a. For fixed income holdings fees are very important and thus we prefer VGLT.


Read the rest of the report here on Seeking Alpha.

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