Seeing opportunity through market complexity
The case for fixed income has strengthened despite uncertainty around inflation, deficits, geopolitics, and interest rates. Higher yields are creating attractive income potential and expanding opportunities for active managers. Explore where Vanguard sees value across mortgage-backed securities, investment-grade credit, and municipal bonds. See how portfolios are positioned to navigate today's evolving rate and inflation landscape.
Key takeaways
Performance recap
The U.S. economy remained resilient in the third quarter, supported by consumer spending and AI-related investment. Firm growth, elevated energy prices, and a stable labor market led the Federal Reserve to raise rates in September, lifting Treasury yields across the curve. Credit markets remained well supported by healthy fundamentals and strong investor demand. Higher volatility led mortgage-backed securities to underperform, while record municipal issuance overwhelmed demand and lifted tax-exempt yields to their highest levels since 2008.
The big picture
Looking forward, the case for owning fixed income has become more compelling. Elevated yields provide investors with attractive income and a larger cushion against uncertainty, even as policy and geopolitical risks remain in focus. Importantly, the recent rise in yields has been driven more by resilient growth and higher real yields than by higher long-term inflation expectations. With global bond yields near their highest levels in roughly two decades, we believe fixed income offers effective value across a range of potential economic outcomes.
Our approach
Higher yields and greater dispersion across fixed income markets have expanded the opportunity set for active investors. We are focusing on areas where valuations have improved, and security selection can add the most value. As a result, we remain underweight U.S. Treasuries in favor of sectors we view as offering more attractive risk-adjusted return potential. We see attractive opportunities in mortgage-backed securities following the recent repricing and remain constructive on investment-grade credit and securitized assets, where yields continue to offer compelling income potential. In global rates markets, we favor select relative-value opportunities, including an overweight to German bunds versus U.S. Treasuries and targeted positioning across Europe and Japan. In municipals, elevated yields and attractive structures have created meaningful value in high-grade bonds further out on the curve.
Related items
Notes
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in bonds are subject to interest rate, credit, and inflation risk.
- Municipal bond fund distributions, including any market discount recognized by the Fund's investments, may be taxable as ordinary income or capital gains. A majority of the income dividends that you receive from the Fund are expected to be exempt from federal income taxes. However, a portion of the Fund’s distributions may be subject to federal, state, or local income taxes or the federal alternative minimum tax. You should consult your own tax advisor with respect to any particular U.S. or non-U.S. tax consequences of your investment in the Fund.
- Past performance is no guarantee of future results.