Vanguard Group Inc., one of the world’s largest money managers, is sticking with its bet on US Treasuries, saying yields in the $31 trillion market are near the top of its expected range for 10-year notes.
“In US rates, we maintain a long duration bias with yields near the top of our expected range for the 10-year Treasury,” Sara Devereux, Vanguard’s global head of fixed income, said ahead of the firm’s latest outlook, set to be published later this week.
The market has come under fresh pressure as rising oil prices and signs of faster inflation fuel concern that borrowing costs may stay higher for longer. Treasuries extended their slide Monday after posting their worst week in a year, with the 10-year yield briefly rising above 4.63%, its highest intraday level since February last year, and 30-year yields moving further above 5.1% as bond markets in the UK and Japan also sold off.
Vanguard, with about $12 trillion under management, said “persistently above-target inflation and an improved labor-market outlook have shifted our expectations for the monetary policy path modestly higher, raising the likelihood the Fed remains on hold through year-end,” adding that the prospect of future easing is “more limited and backloaded.”
The benchmark 10-year yield has climbed from below 4% since the conflict in the Middle East began nearly three months ago, as markets have erased expectations for rate cuts under new Fed Chair Kevin Warsh. Traders now price in a quarter-point rate increase by March 2027 and see strong odds of such a move by December this year.
Vanguard said increased spending on artificial intelligence could eventually make the economy more productive, support growth and help ease inflation. For now, though, the firm said supply shocks and investment-driven demand are still pushing inflation higher, and it is watching for signs that those productivity gains are starting to show up in the broader economy.
Vanguard’s base case is that the US economy remains resilient, though it said that outlook could be hurt by a longer Iran conflict, higher geopolitical risk premiums and supply-driven inflation pressures. It also warned that if AI investment delivers less than expected or takes longer to pay off, growth could weaken over time.
Active investment positioning in rates from Vanguard include:
- Outside the US, the firm said it remains short duration with a curve-flattening bias in JGBs and is underweight the yen, as policy normalization in Japan lags inflationary pressure.
- In relative-value trades, Vanguard said it is long Bunds versus Treasuries, as the stronger relative medium-term US growth outlook should see Treasuries underperform Bunds, with ECB tightening already priced in.
- Vanguard holds “a cycle-normal overweight” in US mortgages “via hybrid ARMs, CMOs, non-agency RMBS, and reduced ACMBS overweight.”
- In credit, Vanguard said “trend-like growth, strong corporate fundamentals, and a neutral-to-supportive Fed” support “a constructive outlook for risk assets.” The firm plans “to stay overweight credit and trade the range opportunistically.”
Written by: Michael MacKenzie @Bloomberg
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