2020: A good year for bonds, but it's uphill from here

January 27, 2021

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What started off as a horrendous year for financial markets turned out to be a lucrative one, particularly for bond investors. But they should set their expectations lower for 2021, according to our latest issue of Vanguard Active Fixed Income Perspectives.

Across U.S. and global fixed income markets, credit spreads are near their lowest point in 10 years. Over the course of the full year, Treasury Inflation-Protected Securities (TIPS) and U.S. corporate issues had the highest total returns at 11% and almost 10%, respectively. But U.S. high-yield and emerging markets debt had the highest returns for the fourth quarter (6.5% and 5.9%, respectively).*

Yields for junk bonds are at their lowest ever. At this point, Vanguard fixed income managers believe the issuer fundamentals have bottomed out and are focusing more on avoiding the losers than on picking winners.

Vanguard managers are back to their positioning at the start of 2020—maintaining what they see as the sweet spot in the middle of the credit quality spectrum. They also believe that there are still selective opportunities in mortgage-backed securities.

With valuations across sectors more expensive, Vanguard managers believe that total returns in 2021 will be modest. But much will depend on monetary and fiscal actions, supply chain disruptions, pent-up demand, and other factors in a postpandemic world.

Nevertheless, bonds will continue to largely fulfill their two primary purposes of providing diversification against equity risk and preserving capital.

Learn more about our views on the global economic outlook, interest rates, credit markets, and the implications for Vanguard funds in the latest issue of Vanguard Active Fixed Income Perspectives.

* Sources: Bloomberg Barclays Indexes and J.P. Morgan EMBI Global Diversified Index, as of December 31, 2020.

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Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.
  • Past performance is no guarantee of future returns.
  • Investments in bonds are subject to interest rate, credit, and inflation risk.
  • High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.
  • Bonds of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.