Sara Devereux, Vanguard’s global head of fixed income, believes bond yields are attractive and will remain so even as the Fed cuts interest rates. Yields are expected to stay above pre-pandemic levels, offering more appealing returns for fixed-income investors. Devereux recommends municipal bonds and investment-grade credit for better returns.
The Federal Reserve is expected to start cutting rates in September, with Devereux predicting a gradual decline to a neutral rate between 3.0% and 3.5%. This environment offers a favorable income component for fixed income investors, as bond coupons provide stable returns even if prices fluctuate. Devereux advises investors to focus on clipping coupons for consistent income.
Devereux suggests that investors look to the “belly” of the yield curve for optimal returns, with maturities around five or six years offering a good balance between income and duration. Investing in this range minimizes interest rate risk on both short and long ends, providing stability in the face of rate changes and term premium adjustments.
The biggest risk for bond investors, according to Devereux, is the growing fiscal deficit, which may become unsustainable long-term. Yields on 30-year Treasuries exceeded 5% due to concerns over President Trump’s tax bill adding $3 trillion to the deficit. Devereux warns that markets could see increased volatility if the deficit situation worsens.
Tight credit spreads pose a challenge for fixed income investors, as risky bonds offer little extra yield compared to safer options. Devereux advises against taking on excessive risk to chase higher returns, as it could lead to overstretching and potential losses. It’s important not to compromise on quality in pursuit of additional yield. Sara Devereux of Vanguard believes bond yields will remain attractive post-Fed rate cuts, providing fixed-income investors with appealing returns. Municipal bonds and investment-grade credit are favored, with a focus on security selection over broad market swings. Deregulation and tax cuts are expected to boost the economy in 2026, offering potential opportunities in financials and the Treasury market. Discipline is key in navigating market volatility, with bonds serving as a strategic stabilizer for long-term portfolios.
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Vanguard’s Sara Devereux believes bond yields remain attractive and will continue to be so post-Fed rate cuts. Yields are expected to offer more appealing returns compared to pre-pandemic levels, especially for fixed-income investors. Devereux recommends municipal bonds and investment-grade credit for solid investment options.: Why It’s a ‘Terrific Environment’ for Bond Income