Fixed income, which historically provides ballast and diversification in portfolios against equities during times of volatility, saw negative returns last year as the Federal Reserve aggressively raised interest rates to fight elevated and persistent inflation. Rising interest rates and higher interest rate expectations lowered bond returns in 2022 and created short-term pain for investors.
But there is a bright side: Higher rates mean higher interest payments. This silver lining has led Vanguard to double its return expectations for U.S. and international bonds. The ETF giant now expects U.S. and international fixed income funds to return 4%–5% per year over the next decade, well above the annual returns of 1.3%–2.3% that Vanguard forecasted last year.
“[F]or investors with an adequately long investment horizon, we expect their wealth to be higher by the end of the decade than our year-ago forecast would have suggested,” according to Vanguard. “In credit, valuations are fair, but the growing likelihood of recession and declining profit margins skew the risks toward higher spreads. Although credit exposure can add volatility, its higher expected return than that of U.S. Treasuries and low correlation with equities validate its inclusion in portfolios.”
Long-term investors who are bullish on the long-term prospects of U.S. and international fixed income may want to look into the Vanguard Long-Term Bond Index Fund ETF Shares (BLV) and the Vanguard Total International Bond Index Fund ETF Shares (BNDX).
BLV seeks to track the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index, which includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of greater than 10 years and are publicly issued. As such, BLV can draw from a variety of options when it comes to bond investments.
BNDX, meanwhile, seeks to track the performance of a benchmark index that measures the investment return of non-U.S. dollar-denominated investment-grade bonds. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), which provides a broad-based measure of the global, investment-grade, fixed-rate debt markets.
For more news, information, and analysis, visit the Fixed Income Channel.