Vanguard Group has announced it is increasing its holdings of US Treasury securities, capitalizing on the rise in yields following Middle East conflicts to lock in rates and hedge against potential economic slowdown risks. The asset manager reaffirmed its view that the Federal Reserve will implement one interest rate cut this year, although swap markets have not fully priced in this expectation. In its latest quarterly outlook report, Vanguard’s active fixed-income team noted that it has been adding to long-term bonds as the yield on the 10-year US Treasury has climbed above the "fair value" range of 3.75% to 4.25%. This benchmark rate, which influences everything from corporate borrowing costs to mortgage terms, has risen more than 30 basis points since late February to around 4.3%, driven by tensions involving Iran that pushed up oil prices and reignited inflation concerns. "We continue to view yields above 4.25% as attractive levels to extend duration and enhance portfolio resilience against potential growth risks," wrote Sara Devereux, Vanguard’s global head of fixed income, in the report. Devereux noted that her team entered the market after some pressure in energy markets eased, reducing the risk of extreme central bank policy actions. Crude oil prices briefly exceeded $110 per barrel in early April but have since retreated from recent highs as a two-week ceasefire between the US and Iran took effect, though prices remain volatile. One consequence of the conflict, according to Devereux, is the divergence in global monetary policy, creating relative value opportunities across regions. For example, Vanguard favors German government bonds over US Treasuries, citing the lesser economic impact on the US as a net energy exporter. The firm continues to underweight Japanese government bonds due to fiscal and monetary policy risks. In credit markets, Vanguard maintains a positive outlook on investment-grade bonds, highlighting their strong fundamentals, robust demand, and yields above 5%. However, the firm notes that dispersion among sectors and issuers has increased, meaning investors must be more selective. "Last year’s credit performance was more of a rising tide that lifted all boats, whereas this year is more about bond-picking," Devereux stated. In a separate report released Tuesday, Bank of America strategists also pointed out that US Treasury yields still contain an "excess risk premium" related to Middle East tensions, creating a rare trading window. Led by Mark Cabana, the BofA team recommended that investors buy intermediate-maturity bonds—typically five-year Treasuries—and bet on a steepening yield curve. This strategy is based on three pillars: the eventual fading of war-related premiums, an impending dovish shift in Fed leadership, and the market’s incomplete digestion of the supply surge in long-term bonds.
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