Chris Alwine | Source | Head of Global Credit at Vanguard

Where to Invest in Bonds Now?
Christopher Alwine, head of the global credit team in the fixed income group at Vanguard, notes that such a back and forth around the possibility of a hard landing versus a soft landing will create a slightly different dynamic in the corporate bond market, where a recession would make it tougher for corporate bonds to perform as well as more interest-rate sensitive government bonds.

“That puts us cautious on credit,” which includes markets such as corporate bonds, Alwine says. However, “we’re looking to be opportunistic where the market either gets too pessimistic on recession risk or too optimistic on a soft landing.”

That said, “if you’re looking to put money to work, by historical standards we’re looking at some pretty high levels of yield across the market, especially on credit,” Alwine says. “You might not like your near-term price return on your funds, but we're at a point in yields that they can actually help cushion some of the volatility from new money being put to work,” he says.

“We believe bonds are back, in that regard,” Alwine says.

“The market has priced in a soft landing and now we’re actually going to have to see the data prove that out,” said Alwine. “It’s ‘show me’ time.”

Vanguard likes high-yield bonds as a near-term opportunity, said Alwine, describing their current valuations as being at “average” and “fair” levels.

“That leaves us constructive over the next three months, but cautious over the intermediate term as the Fed tries to engineer a soft landing,” he said. “There’s still room for gains, but we’re still left with a macro environment that says we have a Fed needing to slow the economy down.”

Shorter-duration bonds are less sensitive to interest-rate hikes, and should hold up better than other bonds if the Fed raises rates beyond what the market is expecting, says Christopher Alwine, who oversees $250 billion in Vanguard’s actively managed taxable-bond strategies.