By Christine Idzelis
Higher yields in the bond market are providing a cushion for investors, Vanguard says
The higher yields found in the bond market provide a bigger buffer against volatility compared with a few years ago – and greater potential for upside than downside as interest rates change.
That’s what Vanguard found in a new research note on the “power of income” in the bond market. Based on its starting yield of 4.5% at the end of June, the U.S. aggregate index would see a total 12-month return of 10.3% should rates decline 100 basis points and a 0.7% loss should they rise by the same amount, the table below from Vanguard shows.
While the U.S. economy has been resilient so far to disruptive policy changes to global trade, many investors remain worried about tariffs potentially increasing inflation and slowing growth.
But “broader taxable and tax-exempt bond indexes now offer 2.5 to 3.5 times the income buffer than they did as recently as mid-2021,” Vanguard said in the note. “That means that upward movements in interest rates have a less negative impact on total returns for those who remain invested long enough to reap the benefits of higher coupon income.”
The U.S. bond market posted solid gains in the first half of 2025, with all-in yields helped by those larger fixed coupon payments.
“We think high-quality fixed income is quite attractive here,” providing “decent yield” as well as flexibility and “liquidity” for the portfolio should opportunities arise in more “economically sensitive” areas of the bond market, Sonali Pier, a portfolio manager for multisector credit at Pimco, said in a phone interview.
According to the Vanguard note, broad fixed-income indexes returned 4% to 7.25% during the first six months of this year.
The Pimco Multisector Bond Active Exchange-Traded Fund PYLD, an actively managed ETF that may invest across fixed-income sectors globally, posted a total return of 4.8% in the first half of this year, according to FactSet data. That exceeds the gain of the U.S. investment-grade bond market as tracked by the Vanguard Total Bond Market ETF BND and iShares Core U.S. Aggregate Bond ETF AGG, with each passive fund seeing a total return of slightly more than 4% over the same six-month period.
High-yield corporate bonds – which are riskier and rated below investment-grade – had even larger gains, with the actively managed iShares High Yield Active ETF BRHY returning a total 5% during the first half of 2025.
“Fundamentals are strong within the high-yield market,” when broadly looking at measures such as leverage levels and interest-expense coverage, Mitchell Garfin, co-head of leveraged finance at BlackRock, said in a phone interview. “Companies are, generally speaking, quite healthy.”
Meanwhile, the Federal Reserve’s monetary policy remains in “restrictive territory,” with a potential September rate cut by the Fed appearing this week to be somewhat of a “coin toss,” according to Garfin.
Federal-funds futures on Friday indicated a high probability that the Fed will decide at its July meeting to keep its benchmark rate at the current target range of 4.25% to 4.5%, according to the CME FedWatch Tool. Traders in the fed-funds-futures market are pricing in a 57.8% chance that the central bank could lower its policy rate by 25 basis points at its following meeting in September, the CME data showed at last check on Friday.
The Fed has been in wait-and-see mode as it watches for impacts from President Donald Trump’s tariffs on the U.S. economy, with some early signs of inflationary pressures in the latest reading of the consumer-price index earlier this week.
“Trump’s shadow looms large” over the market, as investors seek to understand the evolving situation on tariffs, George Catrambone, head of fixed income at DWS, said in a phone interview. “Inflation data seems to be benign so far.”
The rate on the 10-year Treasury note BX:TMUBMUSD10Y fell 3.1 basis points Friday to 4.432%, while the 2-year Treasury rate BX:TMUBMUSD02Y declined 4 basis points to 3.876%, according to Dow Jones Market Data.
-Christine Idzelis
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