Active fixed income
January 20, 2023
In 2022, the fixed income market was hit by the brunt of a storm. Low initial rates, surprisingly high inflation, and a rate-hike campaign by the Federal Reserve led to historic bond market losses. We believe volatility will remain high for the foreseeable future, but with increased yields, investors can not only survive the storm but, to borrow a phrase, build back better.
Vanguard Active Fixed Income Perspectives is our in-depth quarterly commentary on the bond markets, with sector-by-sector analysis and a summary of how those views affect Vanguard’s actively managed bond funds.
Tighter credit spreads and higher coupon payments helped generate positive returns in the fourth quarter amid a historically bad year for bonds.
For 2023, we see a transition from pain to gain. While we still anticipate a bumpy road ahead, investors can lock in yields that haven’t been this high in years. More stability in interest rates and clarity on monetary policy should bring flows back into fixed income.
Credit spreads have room to widen, but higher yields will provide more cushion. Valuations warrant a more defensive position focused on higher-quality securities. We believe 2023 will offer the opportune time to add risk.
Note: Investments in bonds are subject to interest rate, credit, and inflation risk.