Vanguard Sticks to Higher-Quality Debt ‘Playbook’ as US Economy Expected to Slow
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 US economy slowing to below-trend growth but avoiding a recession, Vanguard’s fixed-income team led by Sara Devereux wrote in a report to be 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 of late, as investors dial back bets that the Federal Reserve will aggressively cut interest rates. But ongoing US economy strength, alongside resilient corporate profits and strong fund flows, have reduced the valuation gap between high-grade borrowers’ bonds and Treasuries. The average premium for all of investment grade reached its tightest since 2005 last week.
