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Risk in the portfolio: Attractive yields

INVESTMENT OUTLOOK 

Risk in the portfolio: Attractive yields

How are you currently thinking about risk in the portfolio? In this new series, we’ll look at opportunities in fixed income to help you navigate credit spreads, equity valuations, and uncertainty in today’s markets.

 

Fixed income markets are offering yields much higher than recent history

The Yield-to-Worst line graph illustrates a general upward trend in yield from 2015 to 2022, commencing at approximately 3.5%. There is a notable dip to 0.25% in 2019, followed by a steep rise to 4.44% (77th Percentile) by late 2022.

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
: FactSet as of 12/31/2024 - 5/31/2025
Notes: The chart displays daily yield-to-worst figures over time on the Bloomberg U.S. Aggregate Index. The yellow line denotes the average yield over the stated period. Blue lines indicate one standard deviation above and below the mean.

The financial landscape has shifted significantly over the past two decades. By analyzing the yield to worst of the Bloomberg U.S. Aggregate Index, we can observe that the prolonged low-interest rate environment is well behind us. We are now in a phase that bears a closer resemblance to the era we were in before the Great Financial Crisis.

The challenge for us as investment professionals is not to just think about fixed income over the most recent time frame, but to shed that recency bias and think about the next 10 years. There is an opportunity in fixed income given higher interest rates. This could result in your clients possibly earning a real return from quality bonds.

 

The image illustrates the potential within the fixed income market. Text on a yellow backdrop reads, "There is an opportunity in fixed income given higher interest rates. Your clients can earn a real return from quality bonds." Adjacent, in larger font, is the figure "77th Percentile 4.44% yield as of 12/31/24". An individual is depicted beside an oversized, partially eclipsing grey highlighter, drawing attention to the 4.44% yield and advocating for investment in quality bonds amid the current fixed income landscape. The yield, as of December 31, 2024, is positioned in the 77th percentile.

 

Think about your clients—specifically, how much money you’ve helped them make in the equity markets over the last 10 to 15 years. With that amount in mind, they may not need to take on as much risk going forward. In those 10 to 15 years, their goals may have changed from accumulating wealth to preserving capital in their retirement planning strategy. 

In those instances, it’s vital to be having discussions about how to incorporate fixed income a bit more going forward–one reason is attractive top line yields. Ultimately, being prudent in risk taking and fixed income could be a great conversation to have with clients.

 

PORTFOLIO SOLUTIONS

Fixed income solutions tailored to client needs

The way your clients process changing market conditions reflects specific needs, risk tolerances, and goals that also guide how you construct the fixed income portion of their individual portfolios. We’ve assembled these conceptual portfolios to guide how you align the appropriate fixed income opportunity with the power of behavioral coaching. Consider them as a launching point for how you can customize fixed income holdings according to your clients’ unique objectives.


Diversify risk

Concerned about volatility and reduction of principal.


Total return

Comfortable with higher volatility in exchange for higher potential returns.


Income

Rely on bond income to meet spending needs.

Bonds to diversify risk

Client type:

They’re concerned about volatility and don’t want to risk spending down principal.

Action:

Pair high-quality bonds with traditional equities or separately managed accounts.

Investments to consider:

Behavioral coaching takeaways:

  • Address client anxieties by emphasizing that high-quality fixed income investments such as Treasury, core bond, and intermediate-term corporate bond fund investments often move in the opposite direction of equities when the stock market sells off.
  • Reassure clients that their goals can still be within reach because they prepared this way for equity market downturn scenarios.
Stacked bar chart of asset allocation by class. The vertical axis represents the asset classes, and the bars show the percentage allocated to each class. The bottom dark green bar represents the Government asset class at 40%. The three Core I.G. bars above it in shades of green are each 20% of the assets. The highest allocation is to Government debt, while the rest of the portfolio is split into three equal parts between Core I.G. The total value is 100%.

Bonds seeking total return

Client type:

They’re comfortable with higher volatility if it means an opportunity for higher potential returns.

Action:

Pursue a balance between exposure to higher quality Treasury and Core bonds and lower quality high-yield bonds and combine with other asset classes for diversified return.

Investments to consider:

Behavioral coaching takeaways:

  • When clients’ portfolios are well-diversified, clients are more likely to have exposure to whatever is performing well.
  • Any impact from exposure to poorer-performing asset classes will be limited and offset by other assets performing well.
The image is a stacked bar chart representing asset allocation across four categories: Government (Gov't), Core, Investment Grade (I.G.), and High Yield (H.Y.). The total allocation is visually represented as a single bar, with each segment representing the proportion of assets in that category. Government bonds represent 20% of the allocation, with core assets comprising the largest portion at approximately 40%. Investment Grade bonds are allocated 10%, while High Yield bonds make up 30% of the allocation.

Bonds for income

Client type:

They need bond income to meet their spending needs.

Action:

Allocate to bonds with greater credit exposure. This can include diversified active bond funds, active/passive ones, high-yield, and active multi-sector, among others.

Investments to consider:

Behavioral coaching takeaways:

  • Having a steady income stream in the portfolio can relieve the pressure of having to sell equities to fund spending needs.
  • Emphasize to clients that current rate levels are relatively high, both historically and compared against the current dividend yield for equities.
Stacked bar chart with hypothetical asset allocation across three categories: Gov't, Core, and H.Y. The total allocation is divided as follows: Gov't: 20% (Dark Teal) Allocation to government bonds or similar low-risk assets. Core: 40% (Light Teal) Denotes the allocation to core fixed-income investments. H.Y.: 40% (Gold)—The allocation to high-yield bonds. The bar chart illustrates that the "H.Y." and "Core" assets each represent 40% of the total portfolio's asset allocation. The remaining 20% is attributed to "Gov't" assets, indicating a smaller allocation to more conservative investments

Client-specific solutions

Dive into the favorable environment for bonds and solutions designed to meet your clients' specific needs. 

Timely insights
 

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Have questions about fixed income? Contact us.

Disclosures and footnotes

For more information about Vanguard funds or Vanguard ETFs, visit 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.

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 possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

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.

U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.

Past performance is no guarantee of future results.

All investing is subject to risk, including possible loss of principal.

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.