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.

In mid-October, the yield on the 10-year U.S. Treasury note crossed 5%. Then, slower inflation and a dovish tone from the Federal Reserve fueled an all-asset rally to end the year. The 10-year fell quickly below 4% and credit spreads squeezed tighter. Market pricing reflects a soft landing for the economy.

Our positive view on the value of fixed income still holds. We expect interest rates to ultimately settle above the unusually low levels experienced after the 2008 global financial crisis. Investors can capture durable, resilient yields, and if rates decline, additional price appreciation.

Credit spreads are narrow, but overall yields remain attractive. We still hold an up-in-quality bias. Corporate credit and high-yield spreads should widen later this year as the economy weakens, but not to extremes. We await a better entry point to add lower-quality risk. Municipal bonds exhibit strong fundamentals and attractive tax-adjusted yields, with the most value out on the curve and down in credit rating.