Vanguard Sticks to Higher-Quality Debt ‘Playbook’
The world’s second-largest asset manager expects the U.S. economy to slow to below-trend growth, but to avoid a recession.
Vanguard Group Inc. sees more opportunities in the lowest rung of investment-grade bonds, even as spreads for triple-B notes reached their tightest since 1998 last week.
The world’s second-largest asset manager’s “central scenario” remains for the U.S. economy to slow to below-trend growth, but to avoid a recession, Vanguard’s fixed-income team led by Sara Devereux wrote in a report released Wednesday.
“Historically, when economic growth has slowed but stayed positive, higher-quality fixed income has done well,” it said. “We’re sticking to that playbook for now.”
In high-grade, the team said it may add exposure if spreads widen. Valuations in the front end of the curve look more attractive, and sector favorites are banks and utilities, it added.
Bonds have been selling off lately, as investors dial back bets that the Federal Reserve will aggressively cut interest rates. But the ongoing strength of the U.S. economy, alongside resilient corporate profits and strong fund flows, have reduced the valuation gap between high-grade borrowers’ bonds and Treasuries. Last week, the average premium for all of investment grade reached its tightest since 2005.
U.S. junk bonds performed better through September than did investment grade, returning 7 percent for 2024 for single-B and double-B debt, versus 5.7 percent for triple-B corporates, Vanguard said, citing data from Bloomberg.
“We’re more valuation-conscious across lower-quality segments with narrow spreads,” according to money manager’s report. While calling credit fundamentals “favorable,” Vanguard’s outlook for high-yield bonds “continues to be constrained by rich valuations, particularly in higher-rated segments.” Junk-note spreads on Monday reached their tightest since January 2022, according to a Bloomberg index.
The fixed-income team, which said it holds a lower-than-average allocation to high-yield corporates, added, “We see more opportunities in stressed and distressed issuers but remain highly selective.” Vanguard highlighted the cable and media sectors as areas of opportunity, with bonds trading at deep discounts.
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