Portfolio perspectives
Expert Perspective
|June 11, 2025
Know the power of high-quality fixed income in turbulent markets
Each month, you'll have access to the latest insights from our Portfolio Solutions experts to help you address evolving issues that may affect your clients' portfolios. In this edition:
- Higher-quality fixed income has, on average, provided positive returns during the worst-performing months for equities.
- When using fixed income as a diversifier against equity risk, the category of fixed income matters—with high quality bonds historically providing the most consistent ballast.
Know the power of high-quality fixed income in turbulent markets
Given the volatility in interest rates over the last few years and the recent fluctuations in the equity markets, many of our conversations with advisors have focused on the role fixed income plays in their client’s portfolios.
We often point out that the composition and type of fixed income the advisor recommends should be evaluated in light of the overall portfolio and be consistent with the client’s goals, whether those goals’ emphasize capital preservation, diversifying equity risk, enhancing total return, or offering higher income. With the recent equity volatility, we decided to focus on the role of fixed income as an equity risk diversifier, or ballast, during equity market downturns.
Performance during equity market downturns
First, we looked at the key metric of how various fixed income investments perform during the worst decile of equity market returns. We examined the historical performance of various fixed income or fixed income replacement categories during the worst decile of U.S. equity monthly returns from 1988 to 2024 (See Figure 1). The data reveal that higher-quality fixed income has, on average, provided positive returns during these periods, acting as a reliable ballast against equity risk.
Figure 1: High-quality fixed income has been a top performer when equities are at their worst
Median monthly asset class returns during bottom-decile U.S. equity months (1988–2024)
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.
Source: Vanguard Investment Advisory Research Center using data from Morningstar and FactSet.
Notes: Worst decile U.S. equity market performance as defined by the worst 10% of monthly U.S. equity returns from January 1, 1988, to December 31, 2024. Ultrashort Treasuries as measured by FTSE Treasury 3-Month Index; U.S. bonds as measured by Bloomberg U.S. Aggregate Bond Index; Treasury bonds as measured by Bloomberg U.S. Treasury Index; corporate bonds as measured by Bloomberg U.S. Corporate IG Index; U.S. high-yield bonds as measured by Bloomberg U.S. Corporate High Yield Index; U.S. stocks as measured by Wilshire 5000 from January 1, 1990, through April 22, 2005, MSCI U.S. Broad Market Index through June 2, 2013, and CRSP US Total Market Index, thereafter.
Consistency of fixed income performance
A critical question is how persistently various fixed income categories help when equity returns are poor. The data show that ultrashort Treasuries and higher-credit-quality investments have more consistently held up in bear market environments, while longer-duration Treasuries have mixed results depending on whether the bear market coincided with rising interest rates and/or inflation.
Figure 2: High-quality fixed income categories have provided more consistent ballast for equity risk
Cumulative returns during U.S. equity bear markets
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.
Source: Vanguard Investment Advisory Research Center using data from Morningstar and FactSet.
Notes: Cumulative total returns were generated using daily returns for the various bear markets. Ultrashort Treasuries represented by FTSE 90-day T-bill; U.S. Agg represented by the Bloomberg U.S. Aggregate bond index; U.S. equities represented by S&P 500 Index, and Core, Coreplus, Multisector, and High-yield active represented by the average net returns of the active managers in the respective Morningstar fixed income categories.
During the period of rising rates and higher inflation in 2022, and the subsequent bear market in equities, many fixed income categories did not act as a traditional ballast for equities. This may influence how advisors and their clients now perceive the role of various fixed income categories in a portfolio. When we look at the latest downturn in the equity markets, we see that diversified bond returns have been volatile but have held up relatively well compared with 2022.
Recommendations for advisors
For advisors considering how to allocate fixed income in their clients’ portfolios, a holistic approach should start with defining a particular client’s investment goals and the role that fixed income will play in their portfolio. We’ve seen how the advice and coaching that advisors have provided to their clients over the recent market volatility has been successful in keeping clients on course. As the data show, it’s been high-quality bonds—and for those concerned with interest rate volatility, shorter duration high-quality bonds—that have acted as an equity risk diversifier or ballast during equity market downturns.
To that end, consider how a broad-based, high quality active core fund, like Vanguard Core Bond ETF (VCRB), might provide ballast in your client’s portfolio. Or, if you want to manage specific sector and duration allocations yourself, consider combining short- and intermediate-term Treasury ETFs, such as Vanguard Short-Term Treasury ETF (VGSH) and Vanguard Intermediate-Term Treasury ETF (VGIT), to achieve your client’s target duration.
You can find each client’s ideal duration and fine tune their fixed income portfolio, using our Bond duration tool.
Partner with Vanguard Portfolio Solutions
Want more insight on best practices for building a high-quality fixed income portfolio designed to protect on the downside during equity market volatility? Connect with our Portfolio Analytics and Consulting team to review your existing fixed income models and see how to best incorporate these ideas in your clients' portfolios!
More Vanguard analysis
For additional expert insights, check out:
- Advisor trends: Find out how your portfolios stack up in comparison with your advisor peers.
- Market perspectives: Turn to Vanguard's senior economists each month for projected returns and monthly economic highlights on inflation, growth, and expected Fed actions.
- Active Fixed Income Perspectives: View our quarterly, in-depth commentary for a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.
- ETF perspectives: Get the latest ETF trends and insights from our investment experts to help you address issues that may affect your clients' portfolios.
Notes:
- For more information about Vanguard funds or Vanguard ETFs, view detailed product information or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
- Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
- 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.
- All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
- Diversification does not ensure a profit or protect against a loss.
- Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk.
- While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates. While the market values of government securities are not guaranteed and may fluctuate, these securities are guaranteed as to the timely payment of principal and interest.
- Vanguard is not responsible for determining what's in the best interest of any underlying client on whose behalf you use this information. As an investment advisor, it remains your responsibility to make a best-interest determination for your clients, so you should review carefully the information presented and the fund's prospectus for more complete information regarding any fees, expenses, investment objectives, and risks, and make your own determination as to its appropriateness before you rely on it.
- Duration weights are calculated using the most updated fund data available at time of processing.
- CFA® is a registered trademark owned by the CFA Institute.