High quality bonds, low cost serve in windy weather


Tim Buckley: John, frankly, we have seen a massive reduction in revenue for farms and municipalities. So, what are the consequences that many people are talking about? Did people lose payment? Shall we start seeing Bond, the default downgrade? How will the workout be? Can you give us some insights into your team’s thinking through this?

John Holly: Of course, Tim. And you are right – this is a time when it will go down and default. But let’s put it in perspective. If we look at investment grade corporate bonds, for example, even in the worst of recessions, it is unusual for default bonds to be more than 1%. In municipal bonds, defaults are usually much lower than this, even in the worst recessions. In a high-yielding world, it’s not uncommon for a really bad year to be as high as the default rate of 10% or a little more.

But especially in the case of investment-grade corporate and municipal bonds, if you look at it in a diversified portfolio, and the valuations we see today, several of those risks are probably fairly compensable. Downgrade, where credit rating agencies lower the creditworthiness of a bond, is also a risk.

If you look at the corporate bond market, there are some concerns that there could be a large amount of downside to high yields from the investment-grade universe. Some estimate that about িয়ন 500 billion in U.S. corporate bonds could be downgraded in this way. We have already seen the low value of $ 150 billion. But what we have seen is that the high yielding market has been able to absorb it.

So, to some degree, the market is working on a way to adjust it. And when you look at particularly high-quality bonds where a fall will cause the bond price to fall again – again, in a diversified portfolio – those declines and price declines are probably increasing the yield on funds, and probably the expected increase back to the front.

Thus, the risks are real. They are somewhat, already valuable. And history will tell us that in the high quality category, these should not be irresistible. Now that this is an unprecedented time, it may be a bit worse, but we don’t expect that there will be massive defaults like investment-grade corporate and municipal bonds.

Team: John, fair enough. If we just go back and we raise a level, the strategy you employ is that, well, your costs are lower. And if your costs are low, you have fewer barriers. You don’t have to earn so much in the market to pay the bill and then make sure our clients get a great return. So you don’t have to traffic on the most risky bonds out there.

To use a baseball analogy, you like to go out and hit one at a time, and for five, 10-years, even three years, they really crank, so you can not only outperform competitors, but the actual standard. Themselves.

John: I think that’s right. This is one of the advantages of our structure, where we have a truly talented team that adds value across a wide variety of strategies and uses our business model to take a really reasonable amount of risk to produce a top-quarter-type return for our clients. , For a long time.

Also, it really supports the “truth-to-label” approach that we like to take. Our portfolios can invest in the corporate bond market or the mortgage-backed securities market, if that’s their initial sandbox, and don’t really go too far for more speculative investments. They can pay, but they can really surprise an investor that they have this kind of thing in their portfolio. We really value that truth-to-label approach, and it’s backed by Vanguard’s low-fee approach.

Team: Yes, let’s put it this way. Now let me move on to one more portfolio strategy for individual clients. We often tell them, hey, Bond, they ballast. These are your ballast so you can give stormy weather. And people wonder, have they served that purpose? As a bond expert here, are you happy with how you performed the bonds and how they performed in a person’s portfolio?

John: Yes, I think it was good news for people diversified across stocks and bonds. If we go back to early 2020, interest rates were already quite low, especially on high-quality government bonds. People were asking, “Why do I own bonds?” But if we move towards the end of March, a broad portfolio of high quality bonds increased by about 3% in exchange, while the S&P 500 was down about 20%.

So again, even with low yields as your starting point, a ballast and as a diversifier in a portfolio, bonds have proven their worth again. I think it is fully consistent with our long-term guidance to diversify your investment.

Important information:

Past performance is no guarantee of future income. The performance of an index is not an accurate representation of a particular investment, as you cannot invest directly in an index.

All investments are at risk, including the potential loss of the original investment.

There is no guarantee that any specific asset allocation or combination of funds will meet your investment objectives or give you a certain income level.

Bond funds are subject to the risk that an issuer will fail to pay on time and the price of the bond will fall because of an increase in interest rates or a negative perception of the issuer’s ability to pay.

Diversity does not guarantee gain or protect from loss.

2020 The Vanguard Group, Inc. All rights reserved.

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