Are fixed income portfolios built for today's market?

In recent years, advisors have built fixed income portfolios with a lot of cash or cash equivalents, avoiding interest rate risk while adding income through higher allocations to lower-grade credit bonds.

For those who have done so, that’s been a good call given the level of yields and shape of the yield curve at the time, which rewarded short-term bonds relative to long-term during sharp rises in interest rates. That’s been reinforced this year by the backup in rates across the yield curve and the recent federal funds rate hike by the Federal Reserve.

As of our most recent analysis, cash remains a significant allocation for advisors. More so, around two-thirds of advisors continue to hold portfolio durations more than 0.5 years below the broad bond market—and roughly half over a year short—as they replaced government bonds with more credit bonds and cash.¹

Question: Will that be the best path going forward?

Changing dynamics

Rising interest rates have changed the fixed income dynamics across the yield curve and credit spectrum. With yields we haven’t seen since before the global financial crisis, high-quality bonds can once again offer income and then some.

Now there’s even more income to be had, and the higher income acts as a buffer to yield curve changes, making the relative impact of any interest rate risk less painful.

Current yields mean that even if interest rates were to increase by 50 basis points, U.S. Treasuries of up to 10 years in maturity would not lose money over the next year. That’s a stark difference compared with 2022. Back then, super low yields meant that additional rate hikes guaranteed a year-long loss in many bond funds.

Observing the impact of rising rates is one angle, but there’s a new angle in today’s market. A portfolio concentrated in cash and riskier credit now could face challenges or miss opportunities if economic growth weakens, perhaps because of a sudden AI investment slowdown, and markets look for a haven.

That may seem counterintuitive, given recent headlines focused on a global backup in interest rates. But remember, in the bond market, bad news can be good news, as starting yield has historically been one of the best predictors of future long-term returns.² In other words, yields tend to be destiny, and higher yields point toward a better destiny.  

Counterbalancing risks

Not all fixed income funds play the same role in a bond portfolio. Some are better for providing diversification and defensive purposes; others are better at generating total return or income.

Consider the objectives of your clients’ portfolios. Respectable income is available everywhere in the fixed income markets—a luxury. Now you just need to know how you balance stability and ballast for the whole portfolio based on client goals.

Vanguard ETFs

Rebalancing fixed income does not require making a single call on rates or credit. Vanguard ETFs let you build the mix deliberately, using broad-market exposure as a core and more targeted ETFs to adjust duration or credit risk.

Core ETFs can provide a centerpiece, while more focused ETFs can help you shorten duration for the overall portfolio or add more Treasury or credit exposure. Index ETFs can allow you to tailor duration down to a fraction of a year.

Vanguard offers a full range of fixed income ETFs across the duration and credit spectrum. The appropriate mix will vary by client. But with yields providing more income and a larger cushion, you no longer need to choose between stability and diversification. Your portfolio deserves another look to make sure it’s striking that balance.

1 Vanguard and Morningstar, Inc., as of June 30, 2026; 962 fixed income portfolios observed at mid-year 2026, with an average of 5 tickers per portfolio.

2 Why higher yields may be good for many retirement investors, Vanguard Group, November 2023. Accessed September 3, 2026.

For more information about Vanguard funds, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund 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.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

All investing is subject to risk, including possible loss of principal. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Investments in bonds issued by non-U.S. companies are subject to risks, including country/regional risk and currency risk. These risks are especially high in emerging markets. High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.