The Tell: Why Vanguard likes U.S. high-yield bonds in near-term after recent big gains

by | Aug 15, 2022 | Stock Market

U.S. corporate bonds with below-investment-grade ratings may still have room for gains, after a strong run so far this quarter, according to Chris Alwine, head of global credit at Vanguard Group. Alwine, who oversees $250 billion of assets, said in a phone interview Monday that within U.S. credit he likes high-yield, or junk, bonds over the next one to three months. At least for now, corporate fundamentals remain “healthy,” he said, while cautioning that Vanguard is anticipating a recession in the second half of 2023.

In recent weeks, equities and riskier corporate bonds have rallied with big returns amid increased optimism that the Federal Reserve could achieve a “soft landing” for the economy as it aims to bring soaring inflation under control by tightening monetary policy, according to Alwine. The Labor Department reported last week that inflation measured by the consumer-price index fell in July on a year-over-year basis to 8.5%, from 9.1% in June. “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 environmen …

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