It’s not surprising that with approximately 13,000 employees worldwide, Vanguard has more than one opinion on bonds, bond yields and bond bubbles. Those opinions are given a full airing on the Vanguard website, so investors can take their pick.
Taxable bond chief Ken Volpert sees a bear market coming down the pike, saying, “bondholders will get hurt,” though he thinks it could be years before it takes a bite out of investors. That said, the man who accurately predicted that the 10-year Treasury would hit 1.5% says Treasurys could possibly be in a “bubble,” though corporate bonds are not there yet.
Gemma Wright-Casparius, Vanguard’s inflation-bond expert and co-manager of Vanguard Inflation-Protected Securities Fund (MUTF:VIPSX), is a bit more sanguine, saying interest rates could go lower and, hence, prices may not be out of hand. “It almost feels as if it is a bubble,” she says, “But there’s a reason and rationale as to why interest rates are where they are,” citing both massive cash flows into bonds as well as economic factors.
What does all of this mean? From the top down, Vanguard’s Investment Strategy Group says bond yields will rise from their current 1.7% on the 10-year Treasury to around 4% … by 2021. Now that’s long-term thinking.
My opinion: Treasurys are, as Volpert says, in a bubble and are a dangerous and unfulfilling investment today. Investment-grade corporate bonds are still a better place to put your money given their higher yields, which will protect investors more in a rising-rate environment. However, they’ve also been bid up in price over the past year or two.
Junk bonds, such as those in Vanguard High-Yield Corporate Fund (MUTF:VWEHX) (now closed to new investors), are the best of the highest-yielders, as junkier fare has been priced way out of the norm by the yield-hungry. That said, junk bonds are not substitutes for high-quality corporates like those you’ll find in Vanguard Short-Term Investment-Grade Fund (MUTF:VFSTX) or its Intermediate-Term Investment-Grade Fund (MUTF:VFICX).
Dan Wiener is editor of The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.