Are fixed income ASX ETFs a good buy right now?

Why this could be a good time to look at bonds.

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Fixed income ASX ETFs could be a good asset class to look at to invest in right now.

If readers aren't sure what bonds are, they should read the linked explainer. Basically, it's investing in a slice of the debt issued by a government or company, which will then pay interest over the term of the loan/bond.

Plenty of bonds have gone through the adjustment pain of higher interest rates. Many bond prices are lower than they were two years ago, pushing the yield of that bond to be higher and comparable with similar assets for similar terms.

Bonds weren't an attractive investment during the period of ultra-low interest rates because the income return on offer was really weak.

But, there are (at least) two good reasons why fixed income ASX ETFs could be a good buy right now.

Better income yields

There are a number of options that investors can choose on the ASX. The three ETFs I'm going to mention are offerings from Vanguard, one of the world leaders in providing cheap ETFs.

Vanguard Australian Government Bond Index ETF (ASX: VGB) provides exposure to Australian government bonds, both federal and state. This ETF now has a yield to maturity of 4.8%, which is a very attractive rate of return considering government bonds are meant to be the safest asset class.

Vanguard Australian Fixed Interest Index ETF (ASX: VAF) provides exposure to a mixture of Australian federal and state government bonds, as well as investment-grade corporate issuers. This fixed income ASX ETF has a yield to maturity of 4.95%.

Vanguard Global Aggregate Bond Index (Hedged) ETF (ASX: VBND) provides exposure to bonds from governments, government-owned entities and investment-grade corporates. There are a total of 2,910 issuers with this portfolio. The yield to maturity of this one is 4.44%.

Interest rates have peaked?

The capital value of bonds has suffered over the past two years because of rising interest rates. But, the risk of capital losses could be reducing significantly with interest rates in the US and perhaps Australia at their peaks.

If interest rates have peaked, it could make the capital value of bonds very attractive.

In fact, the next move by the US Federal Reserve could be a cut, though investors may need to wait a while for that move.

If interest rates do start falling then this could turn into capital growth for the bond price, while investors also get a solid level of passive income.

Foolish takeaway

I do think it's a good time to look at bonds because the outlook for both income and capital growth is promising. However, I'm not looking to invest with my own portfolio because I think individual ASX shares have a stronger upside potential if they do well.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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