Active Fixed Income Perspectives Q4 2025: Caught in the crosswinds

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Active Fixed Income Perspectives Q4 2025: Caught in the crosswinds

Vanguard Perspective

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October 20, 2025

Big picture

Bonds bounce back: Bloomberg U.S. Universal Index is up 6.3% year to date as of September 30. The Bloomberg Municipal Bond Index delivered 3.0% just this past quarter. Higher coupons plus price gains equaled strong returns across sectors.

  • Outlook: Favorable conditions expected to continue.

Yield curve shifts: The U.S. Treasury curve steepened as short-term yields fell more than long-term yields. Meanwhile, the 10-year U.S. Treasury settled between 4.0% and 4.25%. We are strategically neutral on U.S. duration and favor intermediate maturities.

Credit

Spreads tighten: Spreads are at the tightest since 1998; demand is strong for credit exposure. We are selective in lower-quality credit, overweight investment-grade issuers with strong fundamentals.

Economy, policy, and outlook

Fed gets proactive: Fed cut rates by 25 basis points in September after a 9-month pause. Two more rate cuts are likely by year-end but possibly fewer than markets expect in 2026.

Policy crosswinds: Tariffs are a drag, but tax cuts, deregulation, and artificial intelligence investment are tailwinds. Pro-growth policies in “One Big Beautiful Bill” could boost 2026 GDP by 0.4%.

Takeaways to consider:

  • Lock in yields: We believe now is a good time for investors who have been sitting with very short-term duration to lock in durable yields further out the curve.
  • Municipals: A historically steep curve offers great value within intermediate and long strategies.
  • Lean on expertise: Vanguard’s deep fixed income team manages $498B AUM.1             

 

Fixed income sector returns and yields

A bar-and-dot chart shows third-quarter 2025 returns, year-to-date returns as of September 30, 2025, and yields-to-worst as of September 30, 2025, for several fixed income sectors. Emerging markets bonds had a third-quarter return of 4.75%, year-to-date return of 10.66%, and yield-to-worst of 6.84%. Municipal bonds had a third-quarter return of 3%, year-to-date return of 2.64%, a yield-to-worst of 3.66%, and a tax-equivalent yield of 6.18%. U.S. corporate bonds had a third-quarter return of 2.60%, year-to-date return of 6.88%, and yield-to-worst of 4.81%. U.S. high-yield bonds had a third-quarter return of 2.54%, year-to-date return of 7.22%, and yield-to-worst of 6.7%. U.S. mortgage-backed securities bonds had a third-quarter return of 2.43%, year-to-date return of 6.76%, and yield-to-worst of 4.74%. Treasury Inflation-Protected Securities had a third-quarter return of 2.10%, year-to-date return of 8.31%, and yield-to-worst of 4.08%. U.S. aggregate bonds had a third-quarter return of 2.03%, year-to-date return of 6.13%, and yield-to-worst of 4.37%. U.S. commercial mortgage-backed securities had a third-quarter return of 1.75%, year-to-date return of 6.32%, and yield-to-worst of 4.51%. U.S. asset-backed securities had a third-quarter return of 1.64%, year-to-date return of 4.62%, and yield-to-worst of 4.18%. U.S. Treasuries had a third-quarter return of 1.51%, year-to-date return of 5.36%, and yield-to-worst of 3.94%. Global aggregate hedge bonds had a third-quarter return of 0.60%, year-to-date returns of 4.05%, and yield-to-worst of 3.48%.

Notes: 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.

Indexes used in chart: The following indexes are represented in the sector returns and yields chart: J.P. Morgan EMBI Global Diversified Index, Bloomberg U.S. Municipal Index, Bloomberg U.S. Corporate Index, Bloomberg U.S. Corporate High Yield Index, Bloomberg U.S. Mortgage Backed Securities Index, Bloomberg U.S. Treasury Inflation-Linked Bond Index (Series-L), Bloomberg U.S. Aggregate Index, Bloomberg CMBS: Erisa Eligible Index, Bloomberg U.S. Asset-Backed Securities Index, Bloomberg U.S. Treasury Index, and Bloomberg Global Aggregate Index.

Sources: Bloomberg indexes and JPMorgan, as of September 30, 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.

1 As of September 30, 2025.            

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Active Fixed Income Perspectives Q4 2025: Caught in the crosswinds

Attractive yields continue to offer opportunities amid market shifts and looming tariff impacts.

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For more information about Vanguard funds or Vanguard ETFs, 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. Past performance is no guarantee of future results.

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.

For the 10-year period ended September 30, 2025, 41 of 48 Vanguard active bond funds outperformed their peer group averages; results will vary for other time periods. Only funds with a minimum 10-year history were included in the comparison (source: LSEG Lipper). Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all investments are subject to risks. For the most recent performance, visit our website at advisors.vanguard.com/investments/all.