Investment outlook for a changing market
The way your clients process changing market conditions reflects their specific needs and risk tolerances. Here, understand the fixed income outlook and consider three conceptual portfolios to help you align the opportunity with your clients’ objectives.
INVESTMENT OUTLOOK
Commentary by Sara Devereux, Global Head of Vanguard Fixed Income Group
While the April 2 tariff announcements were more severe than anticipated, Vanguard’s active fixed income managers were well-prepared for the subsequent market reaction, having trimmed credit risk and moved up in quality, while utilizing duration as a hedge. Amid continued market and policy uncertainty, fixed income remains a crucial component of a diversified investment strategy—serving as a long-term portfolio ballast and providing attractive yields by historical standards.
While we’ve been bracing for policy impacts, the April 2 tariff announcements were a bolt from the blue in terms of their severity, far exceeding our expectations. The reciprocal actions and unfolding situation continue to add uncertainty and complexity across financial markets.
Our previous risk scenario of a "stagflationary impulse," which was growth below 1% and inflation above 3%, is now our base case, and the shadow of a recession looms larger. As my colleague, Joe Davis has said, we are now dancing with a recession.
Our active portfolios were well-prepared, having trimmed credit risk and moved up in quality, while utilizing duration as a hedge. Looking forward, we remain overweight duration, with a bias to yield curve steepening, reflecting the increased odds of a recession, as well as potential rebuilding of term premium. We also remain defensive in credit, with ample dry powder to deploy at wider credit spread levels. In addition, the teams are leaning heavily into security selection and relative value trades, as the opportunity set is strong in this period of volatility.
Our index portfolios continue to employ sophisticated techniques and robust risk management to manage liquidity and ensure tight tracking of the indexes amid rapidly evolving liquidity conditions.
The Federal Reserve is caught between a rock and a hard place, with its dual mandate now in conflict amid material market shifts. Tariffs are like a double-edged sword, expected to spike inflation in the short term while stifling growth and threatening the labor market. The Fed is likely to be cautious about cutting rates preemptively in the face of higher inflation in balancing their dual mandate. However, in the tug of war between stag and ‘flation, we believe the economic slowdown will ultimately tip the scales. This view is supported by long-term inflation expectations remaining stable, as seen in the 10-year breakeven inflation (BEI) rate at 2.20, firmly anchored near the Fed’s target1.
We continue to advocate that investors tune out the short-term noise and focus on the long term. Fixed income has an indispensable role in a well-diversified portfolio. Year to date, fixed income has been a port in the storm, with the U.S. aggregate index up by 1.3% while the S&P 500 has fallen by 8.8% year to date (as of market close Friday, April 11, 2025). Despite recent bond market volatility, yields remain attractive by historical standards—and starting yields are a strong indicator of future returns. Furthermore, in the event of a recession, we expect a rally in high-quality fixed income, which would serve as a ballast, providing essential stability and enhancing portfolio performance. Short term, we anticipate continued volatility in the fixed income market.
Portfolio diversification with a strategic allocation to fixed income is one of the most potent strategies investors have to smooth portfolio returns over the long term. While market downturns are inevitable, patience and a steadfast commitment to long-term investment strategy are crucial.
1 Based on data from the Federal Reserve Bank of St. Louis FRED database through April 11, 2025.
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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:
- VCRB Core Bond ETF
- VGSH Short-Term Treasury ETF
- VGLT Vanguard Long-Term Treasury ETF
- BNDX Total International Bond ETF
- VGIT Intermediate-Term Treasury ETF
- VMBS Mortgage-Backed Securities ETF
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.
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:
- VPLS Core-Plus Bond ETF
- VGSH Short-Term Treasury ETF
- VGLT Long-Term Treasury ETF
- VCIT Intermediate-Term Corporate Bond ETF
- VWEAX High-Yield Corporate Fund
- VEGBX Emerging Markets Bond
- BNDX Total International Bond ETF
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.
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:
- VMSAX Multi-Sector Income Bond Fund
- VCSH Short-Term Corporate Bond ETF
- VEGBX Emerging Markets Bond Fund
- VWEAX High-Yield Corporate Fund
- BND Total Bond Market ETF
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.
Vanguard fixed income investments
- Help create portfolio stability, income, and more for your clients. Check out our full Vanguard fixed income lineup.
- Explore active municipal and active taxable bond funds, as well as our active ETFs.
- Discover how our low-cost advantage helps enable outperformance over time, without undue risk.
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.