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.

Higher-than-desired inflation and a stronger-for-longer global economy in the second quarter helped yields to rise and credit spreads to fall.

Despite yields rising year-to-date, the U.S. Aggregate Float-Adjusted Bond Index has returned 2.12% through June 30, 2023. Such results reaffirm our “bonds are back” view as higher yields can generate positive returns even in the face of continued rate hikes and periods of elevated volatility.

The odds of a recession rise as rates go higher. In the end, we believe a shallow recession will occur. Bonds have traditionally done well after the Federal Reserve stops raising the fed funds rate.

Our strategy favors higher-quality securities that are less economically sensitive. We believe 10-year Treasury yields near 4% are at an attractive level to add duration. In municipals, the longer end of the curve offers better value.

When the Fed is done hiking, quality and duration should prove their mettle. For now, higher yields mean investors are getting paid to wait.