Expert insight
Vanguard economist says it’s time to tilt toward bonds
September 16, 2024
In a recent opinion article featured in the Financial Times, Jumana Saleheen, Vanguard’s chief European economist, noted that while interest rates are close to moving off recent peaks, they are unlikely to end up as low as they were prior to the COVID-19 pandemic. We’re entering a new rate regime in which she sees bonds offering greater value than equities in a portfolio.
Key takeaways from the article:
- In looking at data back to 1984, Vanguard found that, in high-rate regimes, 10-year-ahead actual returns for global equities and bonds were similar at just over 7% annualized.*
- Because bonds offered the same returns as equities but with lower risk (volatility), their performance relative to equities was particularly attractive on a risk-adjusted basis.
- In contrast, in low-rate regimes, 10-year-ahead actual returns from bonds were approximately 4.5% annualized with volatility levels similar to those of equities, making bonds relatively less attractive on a risk-adjusted basis.
Saleheen emphasizes that there is merit in holding some bonds in any environment, but they are particularly valuable to a portfolio in today’s higher-rate regime. Some investors may go further and tilt their portfolios toward bonds. This might better balance the greater likelihood of improved bond returns with less certain similar returns from equities.
Read Saleheen’s article in its entirety on the Financial Times website.
Related links:
- Diversify the way you think about diversification (article, issued September 2024)
- Active and index: Characteristics, not labels (article, issued August 2024)
- Economic payoff of AI is coming—but it’s not here yet (article, issued August 2024)
- Our investment and economic outlook, August 2024 (article, issued August 2024)
Notes:
*In our analysis discussed in this article and the Financial Times article to which we have provided a link, we used the MSCI World Index until December 1987 and the MSCI ACWI Index thereafter as a proxy for global equities, and the Bloomberg US Aggregate Index until January 1990 and the Bloomberg Global Aggregate Index thereafter as a proxy for global bonds.
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Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
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