This is one of the most attractive opportunities for income, Vanguard says. Here's what the firm likes

CNBC

7 days ago

Bond investors still have one of the most attractive entry points in decades to generate portfolio income, according to Vanguard. Though off their highs of the year, yields have remained elevated across the Treasury and credit markets. The 10-year Treasury yield is currently around 4.4% and the Vanguard Total Bond Market ETF (BND) , which provides broad exposure to the taxable investment-grade U.S. market, has a 30-day SEC yield of 4.39%. Bond yields move inversely to prices. BND YTD mountain Vanguard Total Bond ETF year to date Fixed income has also been a stabilizer to portfolio performance this year thanks to their higher starting yields, the firm said a recently released third-quarter outlook. "Higher income returns have helped provide a cushion against recent market volatility, keeping bond returns steady amidst larger swings in equities," the report said. Finding opportunity Vanguard sees opportunities across sectors. Within Treasurys, the firm expects a range-bound environment and prefers holding duration exposure in the belly of the yield curve. When it comes to credit, investment-grade corporates and other high-quality credits offer the most compelling risk-adjusted returns, Colleen Cunniffe, Vanguard's head of global taxable credit research, told CNBC. "Investment-grade corporates remain fundamentally sound, with resilient margins, agile supply chains, and steady productivity gains helping them weather recent tariff noise," she wrote in an email. The Vanguard Total Corporate Bond ETF (VTC) currently has a 5.09% 30-day SEC yield and a 0.03% expense ratio. VTC YTD mountain Vanguard Total Corporate Bond ETF year to date Within the segment, Cunniffe likes short-dated financials for their relative value. Banks are also fundamentally sound since they are well-capitalized with conservative liquidity needs, she added. In addition, Vanguard is overweight BBB-rated industrial issuers. Cunniffe's team also favors utilities within the investment-grade space thanks to their stable cash-flow profiles and strong demand for electricity from the rise of artificial intelligence. "This demand has prompted increased capital investment, leading to more bond issuance and, in turn, more appealing valuations," she said. Outside of corporate bonds, Vanguard sees opportunities right now in mortgage-backed securities. While spreads in the bond market have fallen near some of its lowest levels in decades, MBS spreads have been higher than relative to history — which makes their pricing closer to fair value, Cunniffe said. "There are several pockets of the market that offer attractive return potential with more limited prepayment risk, including agency-backed collateralized mortgage obligations (CMOs), agency-backed specified pools, agency commercial mortgage-backed securities, and non-agency but still high-quality AAA-rated residential mortgage-backed securities (RMBS)," she said. The Vanguard Mortgage-Backed Securities ETF (VMBS) has a 30-day SEC yield of 4.21% and a 0.03% expense ratio. VMBS YTD mountain Vanguard Mortgage-Backed Securities ETF year to date. Lastly, Vanguard is overweight asset-backed securities (ABS), preferring higher-quality issuers and sectors that have proven track records though multiple economic cycles. "Structured products, especially ABS, have lagged the spread retracement we have seen in corporate bonds following the recent tariff-related volatility," Cunniffe said. "This, along with continued higher levels of new ABS issuance, have created an attractive relative value opportunity in ABS."