Active fixed income
October 21, 2022
The third quarter of 2022 was yet another bad period for bonds globally, as inflation broadened and central banks aggressively hiked interest rates to combat it. But that also means bond yields are at their most attractive in many years—much higher than stocks’ dividend yields—providing pockets of opportunity for long-term investors.
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.
Performance
Central banks globally—and especially the Federal Reserve—continue to hoist rates to combat broad-based inflation, which has driven a historically bad year for bonds. Credit spreads have held mostly steady.
Looking ahead
We are not confident that we have seen the peaks in U.S. Treasury rates. Nonetheless, higher yields mean bonds look better going forward. Credit spreads have room to widen further, but the extra income can better absorb market turbulence. A mild recession is likely next year. The trajectory of inflation will dictate how restrictive monetary policy will need to go.
Approach
We believe the most prudent approach is to focus on a core allocation to higher-quality securities that are less sensitive to a weakening global economy. As a complement to that, elevated market volatility has created more dispersion and better entry points in select lower-quality bonds.
Note: Investments in bonds are subject to interest rate, credit, and inflation risk.