Vanguard Scoops Up Treasuries as Iran Conflict Lifts YieldsAI Quick Read(Bloomberg) -- Vanguard is boosting its holdings of Treasuries, taking advantage of higher yields following the Middle East conflict to lock in rates and hedge against the risks of a potential growth slowdown.
In the asset manager’s latest quarterly outlook, its active fixed-income group said it has been adding exposure to longer-rated bonds as 10-year yields rose above their estimated “fair-value” range of 3.75% and 4.25%. The benchmark rate, which steers everything from corporate borrowing costs to mortgage terms, has climbed more than 30 basis points to around 4.3% since late February, as the Iran conflict drove oil prices higher and reignited inflation concerns.
“We continue to see yields above 4.25% as attractive levels to extend duration and build greater portfolio resilience against potential growth risks,” Sara Devereux, Vanguard’s global head of fixed income, wrote in the report.
Devereux said her team stepped into the market after some of the pressures in the energy market eased, which reduced the risk of more extreme scenarios for central bank policies. After trading above $110 a barrel in early April, crude oil has pulled back from recent highs during a now extended two-week ceasefire between the US and Iran, though prices remain volatile.
Devereux said one of the repercussions from the conflict is a diverging path in global monetary policy, which opens up relative-value opportunities across regions. Vanguard favors German bonds over US Treasuries, arguing the US economy is more insulated as a net energy exporter. Vanguard also remains underweight Japanese government bonds, citing fiscal and monetary policy risks.
Vanguard reaffirms its view that the Federal Reserve will deliver one rate cut this year, a scenario that hasn’t been fully priced into the interest-rate swaps market.
In credit markets, Vanguard continues to favor investment-grade bonds, pointing to solid fundamentals, strong demand and yields above 5%. But the firm sees wider dispersion across sectors and issuers, suggesting investors need to be more selective.
“While credit performance last year was better defined as a rising tide that lifted all boats, this year has been more of a bond pickers market,” Devereux said.
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