The tech pillars shaping fixed income’s future

It is an exciting time for technology in fixed income. Compared with the equity market, the bond market is much larger and more opaque, encompassing millions of individual securities that trade over the counter rather than on centralized exchanges. This inherent complexity has historically made it more challenging to navigate, less transparent, and ripe for the application of tech by sophisticated investors.

We are already witnessing rapid advancements in technology fundamentally reshape the bond market. Fixed income trading is becoming increasingly electronic, with more than two-thirds of Treasury trading and nearly 50% of investment-grade corporate trading now occurring electronically.¹ The growth of fixed income ETFs is also playing a pivotal role, not only expanding access for individual investors to increasingly granular segments of the market but also influencing underlying market structure through advancements in portfolio trading. This shift has had a profound impact on professional investors, enabling more efficient execution, enhancing price discovery and liquidity, and reducing transaction costs. At Vanguard, we’ve seized the opportunity to navigate this evolving landscape on behalf of our clients, driving performance while expanding access through thoughtfully designed product innovations.

We’re building on a strong foundation of technology and talent. Our prior investments in machine learning initiatives have created a solid infrastructure for generative and agentic AI to hone our edge and extend our strong performance record.² Guided by investment experts, we’re implementing these innovations across the three pillars of our tech platform:

• Enhanced insights
• Faster decisions
• Optimized execution

We use technology to help our teams work more efficiently and consistently, freeing them to focus on what is uniquely human about investing: exercising keen market judgment, engaging directly with the companies we invest in, building conviction in our investment theses, and continually refining the investment process itself. 

Already, we have identified and incorporated many innovations in our fixed income processes that build on these pillars.

1. Enhanced insights:

AI and machine learning are powering Vanguard proprietary tools that analyze vast datasets, generating repeatable and reliable sources of alpha.

Use case: Generative AI helps our credit research team synthesize information from thousands of earnings calls, news sources, and bond documents, expanding the breadth and depth of fundamental analysis to cover over 5,000 investment-grade issuers. Those inputs, combined with the experience and judgment of our portfolio managers, help us capitalize on relative value signals to add alpha.

2. Faster decisions:

Advanced optimization engines integrate real-time market and liquidity data with proprietary relative value signals from our insights pillar, enabling us to act quickly and scale our intellectual property while maintaining rigor and data cleanliness.

Use case: We have reduced the time it takes for us to create an ETF basket—the process of selecting the bonds used to create and redeem ETF shares—from two hours to under 10 minutes.

3. Optimized execution:

The ability to quickly access and assess high-quality data drives success in the bond market. Tools such as our Liquidity Aggregator streamline dealer quotes and convert them into actionable trades, improving efficiency and scalability across fragmented markets.

Use case: Our municipal bond trading team created proprietary technology that processes about four million dealer quotes a day and generates roughly 100 actionable trades. Liquidity Aggregator improved intraday fair-value pricing accuracy by sharpening relative-value signals, improving pricing insight, and reducing mispricing risk.

The pace of technological change is rapid, requiring us to constantly explore emerging technologies, both in-house and in partnership with leading tech firms to advance our innovation pillars. Examples of current initiatives include:

• Working with Vanguard’s team of AI experts, known as the “AI Garage,” to leverage advanced machine learning to develop a prepayment model for our mortgage-backed securities team to find and capitalize on inefficiencies in the market.
• Our collaboration with IBM to explore quantum computing’s potential to advance portfolio optimization. Early models demonstrated improved outcomes versus today’s purely classical methods. Building on these results and a joint research publication, the initiative has advanced to a second phase focused on scaling to larger, more complex portfolios.

While technology is transforming every facet of fixed income investing, people remain our greatest asset. At Vanguard, we use technology to extend the reach of human expertise, with investment professionals guiding the decisions that matter most.

 Our “human-in-the-loop” philosophy embeds experienced portfolio managers and domain experts directly into the decision-making process, ensuring that Vanguard assesses and applies AI-driven insights carefully. By combining deep expertise with advanced tools, we’re strengthening the disciplined investment approach that helps give clients the best chance for investment success—even in the most challenging market environments.