One of the perks of my job is the opportunity to meet with experts from the world’s most respected investment firms right from the comfort of my Waterville, Maine office! I recently met with Edward Saracino, Senior Portfolio Specialist at Vanguard. His role is to understand the markets, economy, and portfolio managers’ investment decisions and share that information with financial advisors. My conversation with Vanguard was focused on the bond market as well as today’s overall economic landscape.
Right now, Vanguard believes the economic environment is clearer than it was in 2022, but there are still big question marks around inflation and the Fed’s decisions on interest rates. “We believe the market is getting ahead of itself,” said Saracino, as multiple interest rate cuts later this year are already priced in. On the contrary, Vanguard predicts at least one more hike with rates remaining elevated into 2024. This leads them to be more defensive in corporate bonds: emphasize higher credit quality and sectors and industries that can still perform in weaker economies.
The bond market hasn’t faced this exact situation before, but their managers predict the next few years could look a little like 2020. After the initial shock and panic selling brought on by global shutdowns, Vanguard knew that life would go on and there would still be demand for certain goods and services in the economy. This was their cue to become less defensive. In today’s bond markets, “the catalyst will be deceleration of inflation and credit tightening,” Saracino explained.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions and it may not achieve its investment objective. An increase in interest rates may cause the price of bonds and bond mutual funds to decline. The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield. Because of their narrow focus, investments concentrated in certain sectors or industries will be subject to greater volatility and specific risks compared with investing more broadly across many sectors, industries, and companies. Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Vanguard Funds is not affiliated with Golden Pond Wealth Management or LPL Financial.