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.

Stronger economic data during the first quarter reduced 2024 rate-cut expectations. Rates moved higher across the curve and credit spreads tightened further. Lower-credit-quality and shorter-term bonds performed best. The Bloomberg U.S. Aggregate Index ended the period with a return of –0.78%, while the Bloomberg Municipal Bond Index returned –0.39%.

The Federal Reserve aims to ease policy, but sticky inflation poses a noticeable risk to those expectations. Rate cuts may come later than the market expects, giving investors an extended window to lock in attractive yields for the long term. Credit sectors easily absorbed a record amount of issuance in the first quarter, an optimistic sign for the rest of the year. Carry and credit selection will be key in municipals.

We think current yields are fairly priced. In credit, valuations are justifiably rich given sound fundamentals and strong demand. In higher-rated municipal bonds, the long end of the curve offers the best value. Opportunities in lower-quality municipals are best at the short end.