Active Fixed Income Perspectives Monthly Pulse: November 2025
Vanguard Perspective
|November 19, 2025
Active Fixed Income Perspectives Monthly Pulse: November 2025
Key takeaways
Our base case is that the recent surge in corporate capital expenditures (capex) will continue in 2026, resulting in materially higher GDP growth, modestly elevated inflation, and a moderation of the recent rise in the unemployment rate.
In this environment, we expect the Federal Reserve to remain cautious about further interest rate cuts.
The balance of risks around this base case are skewed to the downside. Despite the boost from capex, labor market uncertainty remains a near-term vulnerability and the lack of data resulting from the government shutdown is creating additional uncertainty.
While credit conditions are broadly supportive, tight valuations and recent idiosyncratic credit events have increased the importance of security selection and valuation discipline.
Outlook: Strengthening growth prospects, but continued labor market fragility.
Our expectation for higher capex-boosted GDP growth, moderately elevated inflation, and a fragile labor market, on balance, means the Fed is likely to proceed cautiously on additional rate cuts. Our portfolios reflect optimism about economic improvement, but we remain mindful of tight credit valuations and the technical and policy factors shaping rates.
Labor market uncertainty persists. Recent trends show a “low fire, low hire” environment with weaker supply and demand largely offsetting each other—but the balance is fragile. Without official data, normally provided by the government, alternative sources offer a mixed view: high-profile layoffs contrast with resilience in private surveys and state-level indicators.
Capex surge is driving growth expectations. Continued strong capex underpins our 2026 GDP outlook. While headlines have centered on large-scale AI investments by major firms, underlying data point to broad-based investment strength across sectors.
The Fed remains cautious on cuts. Since the two 25 bps “risk management” cuts in the last two meetings and the announcement of the end of quantitative tightening in December, Fed officials have signaled an additional December rate cut isn’t guaranteed. Limited labor and inflation data owing to the government shutdown adds uncertainty, and without clear signs of labor weakness, the potential for further cuts is limited.
Policy crosswinds to remain a factor. The impact of tariffs is likely to be offset by positives like tax cuts and deregulation. Additional tailwinds to the economy include the government reopening and the lagged boost from lower rates.
Our active positioning: Opportunities for security selection and valuation discipline.
Rates: Eyes wide open. We remain neutral on U.S. duration with a bias toward yield curve flattening given the potential for front-end underperformance. Positive fixed income flows are creating a favorable technical backdrop for yields to remain near current levels. We’ll remain responsive to incoming data as the government reopens.
Credit: Range bound, manageable risks. Tight valuations are supported by healthy fundamentals, strong technicals, and supportive economic growth. Higher capex-driven issuance and a greater possibility of idiosyncratic events could pose a risk to current spreads as the cycle progresses. We are moderately overweight credit with an up-in-quality bias. Valuation discipline and bottom-up security selection remain critical to driving long-term outperformance.
Munis: Opportunity on the curve. Long-end municipal yields have declined, resulting in more normal valuations relative to taxable bonds. However, the curve remains historically steep up to 20-year maturities, where we find particularly compelling return potential. We maintain a marginal duration overweight as a credit hedge, while focusing on coupon and call option selection to drive outperformance.
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