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.

Bond yields initially moved higher in the second quarter in response to hotter-than-expected inflation readings early in the year, but then drifted down as growth and inflation moderated. Lower-quality credit performed best as spreads widened modestly across taxable sectors and narrowed in municipals.

Inflation has decelerated to levels that allow the Federal Reserve to cut interest rates if needed, which improves the total-return prospects for bonds. We don’t foresee significant Fed easing in 2024, but investors shouldn’t miss the opportunity to lock in attractive yields and potentially benefit from the price appreciation that would occur when rates eventually decline.

All-in yields remain attractive across fixed income sectors, but tight spreads keep us cautious about below-investment-grade risk. Tax-exempt credit still offers more room for spreads to tighten. Higher-rated municipal bonds look rich because of separately managed account buying, but considerable value remains, especially in the middle tiers of credit.