- We expect a supportive environment for fixed income investors over the next decade – but periodic volatility is likely to persist in the near term.
- To better equip investors with the tools they need to navigate evolving markets, we have enhanced our range of fixed income ETFs.
- These new ETFs span global government bonds and short-duration euro corporate and euro government bonds, providing core building blocks to target specific fixed income exposures for portfolios.
Our research suggests a supportive environment for fixed income investors in the coming years. Although central banks are now easing monetary policy, we still expect interest rates to settle at higher levels than we saw in the 2010s. This backdrop sets the foundation for solid bond returns.
Our equity view, however, is more cautious. The key tension in risk assets is between momentum and overvaluation. US equities, and technology stocks in particular, are priced for perfection and potentially susceptible to any adverse surprises. This market dynamic, coupled with heightened policy risks, has led to a series of bouts of volatility to start the year.
To give investors the tools necessary to build portfolios for the long term while navigating near-term volatility, we have enhanced our fixed income ETF offering with three new exposures:
These diversified portfolio building blocks can provide the solutions investors need to target specific bond exposures. Here we outline how these fixed income building blocks can help investors to refine their portfolios.
Global government bonds can dampen risk of equity market drawdowns
The broad diversification of the global government bond universe is particularly relevant in today’s markets. From a correlation perspective, a core global government bond exposure can allow investors to brace portfolios against equity market volatility.
For example, euro-denominated government bonds have a correlation of 0.16 to the flagship US equity benchmark the S&P 500 index1. But with global government bonds, the correlation to the S&P 500 approaches zero (0.02)2. We observe this lower sensitivity to equity market moves because the global government bond exposure contains US government bonds, or Treasuries, which continue to be seen as a refuge when investors seek safe-haven assets.
Historically, looking back at major equity market sell-offs, we can see how global government bonds have provided both enhanced risk-dampening properties in addition to, in most cases, a slightly higher return relative to euro government bonds.
Global diversification as an effective risk-dampener
Returns experienced during past periods of equity market sell-offs
Past performance is not a reliable indicator for future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Source: Vanguard. Reference indices – equities: S&P 500, global government bonds: Bloomberg Global Treasuries Developed Countries Float-Adjusted Index Hedged EUR, euro government bonds: Bloomberg Global Aggregate EUR Government Float Adjusted Total Return Index Hedged EUR. Returns are in local currency as noted and include the reinvestment of income.
Hedge uncertainty with short-duration euro government bonds
For investors who might be seeking more targeted exposure, short-duration bonds—which are less sensitive to changes in interest rates than their longer-duration equivalents—can offer a valuable complement to portfolios. How can short-duration euro government bond exposures3 enhance portfolios in the current environment?
The European Central Bank (ECB) has been cutting rates and, in general, we have seen economic data trend downwards over the past two years, with lower inflation and pockets of slower growth. However, recent developments have increased the risk to this view and markets are now expecting the ECB to take a more hawkish stance, as increased spending plans could give a boost to economic growth.
In such times of volatility, a short-duration exposure can provide investors with a portfolio hedge. Indeed, during the past few months both year-on-year consumer price index (CPI) and composite purchasing managers index (PMI) readings have ticked upwards, as the chart below illustrates, and we have also seen yields in the last few weeks shift higher due to increased spending plans by the German government.
Potential for short-term volatility in economic data
Changes in the data could mean rate cuts don’t arrive as expected
Source: Bloomberg. Lefthand side: Eurostat Eurozone Core MUICP (Monetary Union Index of Consumer Prices) YoY NSA, data from 31 December 2022 to 31 January 2025. Righthand side: HCOB (Hamburg Commercial Bank) Eurozone Composite PMI SA, data from 30 September 2024 to 31 January 2025.
Over this time, investors would have been better off (from a return and volatility perspective) in a 1-3 year euro government bond exposure compared with the full-duration exposure. So for investors who are exploring ways to guard against short-term interest rate volatility, adding short-duration euro government exposure could be an effective way to position portfolios.
Capturing the carry with short-duration euro corporates
For investors looking to enhance the yield in their portfolios, short-duration euro corporate bond exposures4 can be a useful tool. As the chart below shows, short-duration euro corporate bonds continue to offer a higher spread over the risk-free rate than equivalent US short-duration corporate exposures5. This spread pick-up is even more attractive compared with the full-duration universe, which has seen significant spread compression overall. Euro short-duration corporates offer more attractive valuations, for the same sound fundamentals.
Euro corporates offer attractive yield
Short-duration euro corporates provide a higher spread versus US
Past performance is not a reliable indicator for future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Source: Vanguard. Data as at 31 January 2025. Reference indices are the Bloomberg Euro Corporate 500 1-3Y Index average option-adjusted spread and the Bloomberg US Corporate 1-3 Yr Index average option-adjusted spread.
Short-duration euro corporate bond exposures also offer a compelling proposition from a diversification perspective. We’ve seen a sharp rise in the number of companies issuing short-dated corporate bonds over the past decade. As of January 2025, the Bloomberg Euro Corporate 500 1-3Y Index has more than 500 issuers, with no issuer in the top 10 making up more than 2% of the index. Therefore, the performance of the index will tend to be less influenced by the bond issues of any one company than an index comprising fewer constituents.
When considering short-duration bond exposure, investors should also understand the longer-term implications – particularly with respect to the power of compounding6. One of the ways that short-duration bonds differ from cash is from a total return perspective, as bonds offer the potential for price appreciation, which cash does not. Investors should not underestimate the power of compounding when analysing how this type of fixed income exposure can complement a portfolio over time.
Learn more about Vanguard’s new fixed income ETFs
Please visit our launch page to learn more about the new ETFs and how they can fit into portfolios. If you would like to learn more about Vanguard’s ETF offering more generally, we invite you to visit our capabilities page.
1 Reference indices are the Bloomberg EUR Government Float Adjusted Total Return Index Hedged EUR. In the context of equity and bond markets, a lower correlation means that the movements of the two asset classes are less closely related to each other. Source: Vanguard using Bloomberg data, as at 31 January 2025.
2 Reference index is the Bloomberg Global Treasuries Developed Countries Float-Adjusted Index Hedged EUR.
3 Reference index is the Bloomberg Euro Aggregate Treasury 1-3Y Index.
4 Reference index is the Bloomberg Euro Corporate 500 1-3Y Index.
5 The “risk-free rate” is the theoretical rate of return of an investment that carries zero risk.
6 In the context of investing, “compounding” refers to the process where the value of an investment grows exponentially over time because the earnings are reinvested to generate additional earnings.
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