Higher short-term interest rates are the centerpiece of the Federal Reserve’s effort to quash persistently high inflation—which appears to be working, said Gregory Davis, Vanguard’s chief investment officer, in a guest column for Barron’s. But many investors today have little experience navigating this type of interest rate environment.
Markets and economy
What the rapid rise in rates could mean for investors
Vanguard’s chief investment officer gives his take on how to navigate the current interest rate environment.
Markets and economy
Market volatility
Page
Interest rates
Bonds
Article
What should investors be thinking about?
- Bonds finally offer income again. Many broadly diversified bond mutual funds and ETFs currently have yields exceeding 4%, at long last delivering meaningful current income to investors.
- There’s also cause for celebration at the shortest end of the yield curve. While many bank savings accounts are still offering less than 1%, some money market fund yields are now at 5% or more, the highest they’ve been since the early part of the 21st century.
- The rapid increase in rates has led to a significant repricing in equities. Such repricings are invariably painful for investors, but the upside is that they set the stage for stronger expected equity returns going forward.
- Expect a bumpy ride. The markets likely will remain volatile even after interest rates plateau, as rate changes take a year or more to fully work their way through the economy. But investors can position themselves for investment success over the long term by building a strategic portfolio that capitalizes on the improved outlook for stocks and bonds, and then staying the course.
Read Davis’s guest column in its entirety at Barron’s.
(Note that Barron’s content is available by subscription only.)
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Access more insights from Vanguard through the links below:
Why the Fed will not cut rates this year (web article, issued June 2023)
A look back and forward at active bonds (web article, issued in May 2023)
Bloomberg Intelligence podcast: Investing over speculating (podcast, issued in April 2023)
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All investing is subject to risk, including possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Past performance is no guarantee of future results.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
Yields on mutual funds, ETFs, and savings accounts are based on data from Vanguard.
IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class as of March 31, 2023. Results from the model may vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.