Portfolio perspectives
Expert Perspective
|May 18, 2026
Portfolio perspectives
Finding income and ballast in the belly of the curve
In this edition:
- While advisors continue to maintain an overweight position to ultrashort and short-duration fixed income, the beginning of 2026 saw an encouraging shift as investors began pivoting into intermediate core bonds.
- Intermediate core bonds sit at a balanced point on the yield curve, helping deliver income, diversification, and ballast across a range of macroeconomic environments.
Navigating rough seas
Ballast is a known nautical term referring to heavy material that is placed low in the hull of a ship. Its purpose is to provide stability and equilibrium, preventing the ship from rolling in severe waves. Just like every ship needs ballast to endure rough seas, every portfolio needs ballast to endure times of market uncertainty and volatility. Enter fixed income. A diversified fixed income allocation can deliver stability and equilibrium to a portfolio, providing the very ballast needed during changing financial tides.
Portfolio trends reveal a preference for short duration
Across thousands of portfolios reviewed by the Product and Portfolio Strategy team in 2025, advisors continued to favor shorter duration in their fixed income allocation. Four out of five advisors maintained a shorter duration relative to the Bloomberg U.S. Aggregate Index (average duration of 5.86 years1). Nearly half were shorter in duration by at least one year, and nearly a quarter were shorter duration by two years or more.
Figure 1: Advisors are still playing it short
Distribution of advisors’ fixed income portfolio durations in 2025.
Source: Product and Portfolio Strategy advisor portfolio data from January 1, 2025, through December 31, 2025.
The beginning of 2026 saw an encouraging shift, though, as investors began pivoting into intermediate core bonds. According to Morningstar, intermediate core bonds ranked among the top categories in taxable fixed income fund flows in January and February, bringing in a total of nearly $44 billion. While the recent U.S.-Iran conflict may have paused this trend, we look beyond the conflict to how investors can be allocating their long-term capital. In this piece, we analyze the potential benefits of intermediate core bonds in today’s markets and the role they can play as a stabilizer to a multi-asset portfolio. As such, a thoughtfully constructed fixed income allocation, with exposure to intermediate duration is critical to delivering income, diversification, and real return over a long time horizon.
The dual role of fixed income
Within a 60/40 portfolio, fixed income is expected to deliver two primary benefits: income and ballast.
1. Income generation: Most fixed income instruments generate a coupon, providing a stable source of returns to investors. When equity returns are volatile, the income delivered by bonds plays an important role as a “shock absorber” to portfolio returns. While the yield on a fixed income security is primarily driven by the risk-free interest rate, credit quality and time to maturity are also key characteristics that impact yield. When allocating to fixed income, each of these drivers impact risk and return. In a typical upward-sloping yield curve environment, the intermediate segment of the yield curve has generally offered more carry than the shorter segment. Over the past 20 years, 5-to-10-year Treasuries have yielded 79 basis points1 more on average than 0-to-3-year Treasuries. This illustrates that a bond allocation that is chronically allocated to ultrashort duration may be sacrificing carry for the sake of "safety", leaving return on the table. In fact, ultrashort duration products can, and frequently do, deliver negative real returns over time net of inflation.
Figure 2: Intermediate bonds have historically delivered more income and total return
Cumulative growth of $100 from April 1, 2006, to April 30, 2026.
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.
Source: Morningstar, Inc., as of April 30, 2026.
2. Ballast: As in the nautical context, fixed income has the potential to deliver ballast in a 60/40 portfolio, helping to offset the drawdown of an equity sleeve. Specifically, bonds that offer enough duration can potentially generate real price appreciation during equity drawdowns, a characteristic ultrashort and short-duration exposures often lack. For long-term investors in a 60/40 portfolio, the role of ballast can be material, where equities drive both capital appreciation and the largest drawdowns. The 2020 COVID sell-off3 and the Q4 2018 equity drawdown4 demonstrated this: Intermediate and longer-term bonds helped offset equity losses, outperforming short duration after each of these events.
Figure 3: The diversification case for moving beyond short duration
Median monthly returns during bottom decile U.S. equity months (June 1999–April 2026).
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.
Sources: Vanguard Investment Advisory Research Center calculations using data from Morningstar Inc., as of April 30, 2026.
Notes: Worst decade U.S. equity market performance as defined by the worst 10% of monthly U.S. equity market returns from June 1999 to April 2026. U.S. equities were measured by the Wilshire 5000 Index from June 1, 1999, through April 22, 2005; MSCI US Broad Market Index through June 2, 2013; and CRSP US Total Market Index through April 30, 2026. High yield as measured by Bloomberg U.S. Corporate High Yield Index. 90-day T-bills as measured by FTSE Treasury 3 Month Index; Ultra-short Gov’t/Credit as measured by Bloomberg U.S. 1-3 Yr Gov't/Credit Index; Short Gov’t/Credit as measured by Bloomberg U.S. 1-5Y Gov’t/Credit Float Adjusted Index; Intermediate Gov’t/Credit as measured by Bloomberg U.S. Intermediate Gov't/Credit Index; U.S. Agg as measured by Bloomberg U.S. Aggregate Bond Index; and Long Treasuries as measured by Bloomberg U.S. Long Treasury Index.
Implementation considerations
The current macroeconomic environment reinforces the case for intermediate-term bonds. While the Federal Reserve remains in a holding pattern, inflation above target continues to create uncertainty around markets and the path of interest rates. For a balanced investor that is uncertain whether the next move in rates will be higher or lower, that positioning represents a more efficient allocation of risk than concentrating at either end of the curve.
While short-duration bonds may be useful for liquidity and tactical positioning, they offer less diversification, more reinvestment risk, and lower total returns over time. In contrast, long‑duration bonds have provided more support during recessions but also come with greater sensitivity to inflation and term premium swings. Intermediate core bonds sit at the most balanced point on the curve. They can deliver the dual benefit of income and ballast inside a 60/40 portfolio, making them an especially important part of any strategic portfolio design.
Advisors interested in adding intermediate exposure can explore our core fixed income suite:
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1 Duration is as of April 30, 2026.
2 5-to-10-year segment calculated as the average daily market yield of 5-year, 7-year, and 10-year U.S. Treasury Securities over the past 20 years; 0-to-3-year segment calculated as the average daily market yield 3-month, 1-year, and 3-year U.S. Treasury Securities from May 1, 2006, to April 30, 2026.
3 Post 2020 COVID sell-off as defined by March 23, 2020–March 23, 2021: Bloomberg U.S. Aggregate Bond TR USD returned 4.13% versus ICE BofA 0-3Y Treasury TR USD returned 0.49%.
4 Post Q4 2018 Equity drawdown as defined by December 25, 2018, through December 25, 2019: Bloomberg U.S. Aggregate Bond TR USD returned 8.88% versus ICE BofA 0-3Y Treasury TR USD returned 3.28%.
More Vanguard analysis
For additional expert insights, check out:
- Advisor Trends: Find out how your portfolios stack up in comparison with your advisor peers’.
- Market perspectives: Turn to Vanguard's senior economists each month for projected returns and monthly economic highlights on inflation, growth, and expected Fed actions.
- Active Fixed Income Perspectives: View our quarterly, in-depth commentary for a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.
- ETF Industry Perspectives: Get the latest ETF trends and insights from our investment experts to help you address issues that may affect your clients' portfolios.
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