By Davide Barbuscia
In the face of a challenging summer for bond investors, U.S. asset manager Vanguard remains confident in longer-dated Treasuries. Vanguard’s optimism stems from its belief that the Federal Reserve is nearing the end of its rate hiking cycle and that the economy will experience a slowdown next year, making long-term bonds an attractive option.
The surge in U.S. Treasury yields in recent months has raised concerns among investors, with 10-year Treasury yields surpassing 5% for the first time since 2007. However, Vanguard argues that an economic slowdown would lead the Fed to cut borrowing costs, driving down prices of shorter-dated Treasuries and making longer-term bonds more appealing.
Vanguard emphasizes the potential benefits of locking in higher rates for longer durations, as the advantage of short-term government bonds can diminish rapidly. This perspective aligns with Bill Ackman of Pershing Square Capital Management, who recently covered his bet against longer-term bonds due to the increased risk associated with current long-term rates.
Despite expectations for Fed rate cuts, Vanguard projects that interest rates will not be reduced until at least mid-2024 and that bond yields will not return to their historically low levels. However, Vanguard also anticipates that the Fed is at or near the end of its hiking cycle, making long-term bonds appealing due to their high yields and potential capital appreciation in the event of an economic slowdown.
Vanguard sees fixed income evolving into a new era in which bonds offer significantly more value in terms of total returns and portfolio stability. Additionally, the firm expresses optimism regarding highly rated corporate bonds, believing that these companies have strong fundamentals given their ability to avoid or minimize long-term borrowing and associated funding costs.
“We believe we are in a new era for fixed income in which bonds offer significantly more value – both in total returns and as better ballast within an overall portfolio,” says Vanguard.
Overall, Vanguard’s fixed income outlook signals its bullish stance on longer-dated Treasuries and highly rated corporates, emphasizing their potential for attractive returns and their role in diversified portfolios.
(Reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Will Dunham)
