May 11, 2022
If the period after the great financial crisis was considered the “new normal,” then the current period should be considered the “New Reality,” an environment with more uncertainty and little historical precedent. The New Reality will affect geopolitics, supply chains, currencies, and investment decisions.
Vanguard Active Fixed Income Perspectives is our quarterly in-depth commentary. It offers a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.
A sharp rise in interest rates drove the largest quarterly loss in decades for the broad bond market. The financial markets adjusted to the Federal Reserve’s more urgent monetary policy to fight 40-year highs in inflation. Credit markets held steady, but the removal of the Fed’s accommodative policy should challenge that.
The markets expect the Fed will take rates into restrictive territory during its rate-hiking cycle next year. The tighter financial conditions required to calm inflation will create much uncertainty.
Market volatility presents potential opportunities, and we’ve increased liquidity levels across our portfolios to capitalize. We see fewer top-down sector opportunities but anticipate a wider variety of attractive bottom-up trades. Global fixed income markets are vulnerable to a number of potential shocks.