January 10, 2022 | Vanguard Perspective

Global fixed income outlook and implications for client portfolios

With the Federal Reserve expected to begin raising interest rates this year, many advisors are reevaluating their clients' fixed income portfolios.

Based on our economic and market outlook for 2022 and beyond, we offer a synopsis of our projections in various fixed income asset classes. Based on those projections, we then list which of our funds and ETFs can help you position client portfolios over the long term.

Overall fixed income market


  • Rates have risen modestly since 2020 which means that our outlook is commensurately higher.
  • Central banks globally are likely to raise short-term policy rates over the coming year. But rising rates are unlikely to produce negative total returns in the medium to long term. Secular forces should keep long-term rates low.


  • The fixed income return outlook in the next decade has ticked up from 2020's projections, to an annualized 1.4%–2.4%.1
  • Bonds continue to diversify equity risk.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The forecast corresponds to the distribution of 10,000 simulations of the Vanguard Capital Markets Model® for 10-year annualized nominal returns in USD for asset classes highlighted here. Median volatility is the 50th percentile of an asset class’s distribution of annualized standard deviation of returns. Asset class returns do not take into account management fees and expenses, nor do they reflect the effect of taxes. Returns do reflect reinvestment of dividends and capital gains. Indexes are unmanaged; therefore, direct investment is not possible.

Source: Vanguard calculations, as of September 30, 2021.

Vanguard active strategy2: Core Bond_VCOBX, Core-Plus Bond_VCPAX

Vanguard ETF: Total Bond Market_BND



  • Broad U.S. investment-grade bonds should outperform U.S. Treasury bonds by 50 basis points on an annualized basis.


  • Credit bonds appear expensive. Investors are still expected to be compensated for assuming credit risk, though by about half as much as we suggested in 2020.

Vanguard active strategy: Intermediate-Term Investment-Grade_VFIDX

Vanguard ETF: Total Corporate Bond_VTC



  • High-yield credit has outperformed investment-grade credit over the last year because of tightening spreads.3 This has led us to lower our return outlook for high yield.
  • Across emerging markets, economic growth could prove uneven and, in the aggregate, trend close to 5.5%.


  • Valuations for high yield and emerging markets bonds appear stretched, but they still offer greater potential for return than other major fixed income categories.

Vanguard active strategy: High-Yield Corporate Fund_VWEAX, Emerging Markets Bond_VEGBX

Vanguard ETF: Emerging Markets Government Bond_VWOB

Treasury Inflation-Protected Securities (TIPS)


  • Although global inflation should cool, its composition should be stickier. More persistent, wage-based inflation should remain elevated.


  • TIPS are likely to return less, but we believe they remain a valuable inflation hedge for investors sensitive to inflation risk.

Vanguard active strategy: Inflation-Protected Securities_VAIPX

Vanguard ETF: Short-Term Inflation Projected Securities_VTIP

International & global


  • Expected returns for non-U.S. bonds in the next decade are marginally lower than for those of U.S. bonds, given the relatively lower yields in non-U.S. developed markets.


  • Diversification through exposure to hedged non-U.S. bonds should help offset some risk specific to the U.S. fixed income market.

Vanguard active strategy: Global Credit Bond_VGCAX

Vanguard ETF: Total International Bond_BNDX


1 Please note that the figures are based on a 0.5-point range around the 50th percentile for fixed income return outcomes.

2 All ticker references are to the mutual funds' Admiral Shares.

3 High-yield credit as measured by Bloomberg U.S. High Yield Corporate Bond Index and investment-grade credit as measured by Bloomberg U.S. Credit Bond Index.


  • For more information about Vanguard funds or Vanguard ETFs, obtain a prospectus (or a summary prospectus, if available) or call 800-523-1036 to request one. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • 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.
  • 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.
  • All investing is subject to risk, including the possible loss of the money you invest.
  • 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.
  • Emerging markets bonds are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.
  • IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of September 30, 2021. Results from the model may vary with each use and over time.
  • The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
  • The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.