With a new presidential administration slated to take office in 2025, fixed income investors may be feeling the angst of uncertainty when it comes to their bond portfolios. However, Vanguard sees the risk/return trade-off for bonds as favorable.
It’s not just safe haven U.S. Treasuries with potential upside, but the global bond market. This could open pathways for investment in global bonds to further diversify a fixed income portfolio.
“Higher starting yields have greatly improved the risk-return tradeoff in fixed income. Bonds are still back,” noted Vanguard in an economic market outlook for 2025. “Over the next decade, we expect 4.3%–5.3% annualized returns for both U.S. and global ex-U.S. currency-hedged bonds. This view reflects a gradual normalization in policy rates and yield curves, though important near-term risks remain.”
There may also be angst about whether bond yields will drop to unfavorable levels given the Federal Reserve’s easing of monetary policy. But that too appears to be promising given Vanguard’s forecasts for growth.
“We believe that yields across the curve are likely to remain above 4% in the U.S. A scenario where supply-side tailwinds persist will be supportive for trend growth and thus real rates,” Vanguard added. “Alternatively, the emerging risks related to global trade and immigration policies would also keep rates high due to increased inflation expectations.”
3 Options for U.S. & Global Exposure
Those looking for bond exposure, but who want to stay within the confines of U.S. borders, will want to look at the Vanguard Total Bond Market Index Fund ETF Shares (BND ). The fund offers exposure to a wide spectrum of public, investment-grade, taxable, fixed income securities, as well as mortgage- and asset-backed securities in the U.S. The fund adds more diversification via exposure to government, corporate, and international-dollar-denominated bonds.
For investors looking to add international bonds without U.S. exposure can take a look at the Vanguard Total International Bond Index Fund ETF Shares (BNDX ). The fund tracks the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Its portfolio is primarily investment-grade debt; therefore, credit risk is minimized.
For the best of both worlds, investors can consider the Vanguard Total World Bond ETF (BNDW ), which adds exposure to both BND and BNDX via a fund of funds structure. Per its baseline fund description, BNDW seeks to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index. That index measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S.-dollar-denominated bonds.
For more news, information, and analysis, visit the Fixed Income Channel.
