Bond market opportunities with rising inflation

Rapidly rising interest rates due to high inflation have caused volatility in the bond market. However, portfolio managers at Vanguard say that investors who hang in there are probably going to reap benefits in the time to come.

Daniel Shaykevich, Senior Portfolio Manager at Vanguard, talks about the long-term forces such as geopolitical worries in Europe, a weak labour market and steep energy prices, that are causing inflation.

“Considering both upside risks to rates and downside risks to growth, we have reduced our credit position to a more neutral level. With sufficient dry powder, you can be in a good position to take advantage of opportunities,” says Shaykevich while discussing the rate hikes by the US Federal Reserve and the Treasury inflation-protected securities (TIPS) market in the US.

Additionally, the investment management firm sees opportunities in the emerging market bond market, which could potentially offer wide enough spread levels to justify the risks. When asked what fixed income investors should do, John Madziyire, senior portfolio manager at Vanguard, says that investors should lean into short-maturity bond funds to reduce the duration risk. However, when interest rates are coming down investors should look at longer-maturity bond funds to increase duration risk.

“The downside from here should be pretty limited (for the bond market). Even if the Fed raises rates until we get a recession, it will have to start cutting again, and your fixed income returns will start coming back,” says Vanguard’s Madziyire.

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