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Don’t try to time the market with government bonds, Vanguard warns

26 June 2023

Vanguard’s head of fixed income investment explains why trying to figure out the right entry point for sovereign bonds is not a good idea.

By Jean-Baptiste Andrieux,

Reporter, Trustnet

As inflation nears its peak and the expectations of a potential recession, investors might be trying to figure out the right entry point for government bonds.

However, Kunal Mehta, head of fixed income investment at Vanguard, warned that it is a hazardous strategy that is not likely to work as expected.

He said: “If you are looking to time markets on interest rates, it's never a good entry point, because the probability of getting it right is just so low. Fed futures, Treasury futures or government bond futures don't have a large probability of accuracy relative to the rates.

“I caution around making bond allocations based on macro rates views. You don't want to be in a position where you're taking upon trade for a couple of months here and there, thinking that something is going to happen. I don't think that's a trade that's going to pay off.”

In addition, Vanguard does not agree with the market view that the Fed will start cutting rate this year. Instead, the asset manager expects one to two further rate hikes and then a stable rate for the rest of the year.

Last week, the US Fed announced it was pausing its hiking programme but did not put a resuming off the table.

Mehta added that Vanguard expects a recession towards the end of the year, which would favour investment grade (IG) bonds but that investors have to be selective.

He said: “There are definitely more opportunities in IG credit, i.e. US and Europe. With that said, it's going to be very security specific, because broadly speaking, a recession is not being taken into account.”

Vanguard is also cautious of high yield bonds but more positive on emerging markets (EM) high yields.

Mehta said: “We're quite mindful that we're likely to see more defaults in the high yield space.

“With EM high yield, a lot of bad news have been priced into markets last year. We were underweight EM high yield last year, but we've been covering a lot of those underweight more recently, because we believe that a lot of them are already trading at distressed levels.”

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