Active Fixed Income Perspectives Q2 2025: Risks to realities

2 business people greeting each other in a conference room talking in front of a computer

Active Fixed Income Perspectives Q2 2025: Risks to realities

Vanguard Perspective

 | 

April 25, 2025

Expected economic impacts of higher tariffs

  • GDP growth: Revised forecast to fall below 1% for 2025.
  • Inflation: Core inflation, as measured by the Personal Consumption Expenditures Price Index, is expected to rise to nearly 4% year over year.
  • Unemployment: Rate forecast to rise to around 5%.
  • Stagflationary impact: Slower economic growth coupled with rising inflation.
  • Recession risk: Increased likelihood, though not the base case.

 

Federal Reserve's anticipated approach to interest rates

  • Near-term policy: Expected to remain on hold.
  • Year-end target: Federal funds rate likely to fall to 3.25%−4.00%.
  • Inflation monitoring: Assessing tariff-related price increases for transitory or medium-term effects.
  • Policy easing: Will consider easing if medium-term inflation expectations remain stable and labor market weakens.

 

Vanguard's active fixed income team stance

  • Credit: Cautious but opportunistic, favoring resilient companies. Better value in shorter maturities.
  • Sectors: Overweight in pharmaceuticals, utilities, and banks.
  • Interest rates: Optimistic on intermediate durations as a hedge to risk of widening credit spreads.
  • Municipal bonds: Favor high-quality, long-end bonds due to attractive valuations.

 

Actionable takeaways 

  • Reassess bond portfolios: Trim credit risk, move up in quality, favor short to intermediate maturities.
  • Municipal bond opportunities: Encourage clients to consider high-quality, long-end municipal bonds because of attractive tax-exempt yields.
  • Global diversification: Consider funds that can capture a wider range of opportunities in international bonds, hedged for currency fluctuations.
  • Stay defensive: Maintain a defensive stance to have the ability to rotate into riskier segments when valuations appropriately compensate for their risk.

 

 

 

Fixed income sector returns and yields

sector returns

Note: The municipal tax-equivalent yield is calculated using a 40.8% tax bracket, which includes a 37.0% top federal marginal income tax rate and the 3.8% net investment income tax to fund Medicare. Yield to worst represents the lowest yield possible for a security given the current price, taking into account both call dates and maturity.

Sources: Bloomberg indexes and JPMorgan, as of April 9, 2025. 

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 v with a telescope

Join our fixed income webcast

Markets have been shifting at a rapid pace. Get timely takes on fixed income from Vanguard experts at our May 1 event

Register
PDF
Active Fixed Income Perspectives Q2 2025: Risks to realities

Slower expected growth and higher anticipated inflation have roiled the U.S. fixed income market, but we see new opportunities in international bonds.

Read report

Notes:

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.

All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss. 

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.

Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. 

Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.