As the yield on the 10-year Treasury note climbs above 4.7%, its high of the year, longer-term bonds should become more attractive to income-seeking investors. That's not necessarily the case, however. Many investors still crave the security of cash and are happy with the 3.46% yield of the average money-market fund.

Rebecca Venter, a senior fixed-income client portfolio manager at Vanguard, is trying to help financial advisors and other Vanguard clients avoid the mistake of having too short a duration in their bond portfolios. In a recent interview with Barron's Advisor, Venter also explains how Vanguard's relatively new stable of actively managed bond ETFs can potentially improve total returns over staying in cash. An edited version of the conversation follows.

Tell me about your job. In my role on the fixed-income team, I represent Vanguard's active bond managers to external and internal clients. My job is to stay current with what they're seeing in markets and how they're positioning portfolios to take advantage of market opportunities. I act as their proxy when meeting with financial advisors.

Interest rates are higher, which must be generating more enthusiasm among investors for bond funds. What are you hearing from advisors now? We're still having conversations with advisors about moving back to a core fixed-income allocation. We still see a lot of advisors and their clients underweighting fixed income in favor of equities, cash, and other asset classes.

Why does cash remain so attractive? Cash and very, very short-term bonds have been steady. They don't have the kind of credit risks or interest-rate risks that an allocation to longer maturity bonds would typically include.

A lot of folks who seem to be waiting for the perfect entry point back into traditional fixed income. They're waiting for rates to rise just enough that they feel comfortable getting back to a more normal duration profile.

So you'd like to see them increase the maturities of the bonds they own? What duration [a measure of interest-rate risk that takes into account the years to maturity of bonds] should they aim for? At Vanguard, we are able to see thousands of advisor portfolios every year. And when we look at that data and we combine it with what we hear from advisors and clients in conversation, we see that most advisors are much lower in duration than a core allocation would put them.

The Bloomberg U.S. Aggregate Bond Index, known as the Agg, is a great starting point for determining the right duration. Its duration tends to be five to six years. Most advisors are a couple of years short of the Agg, which depending on the client use case, may or may not be appropriate.

Why is that a problem? It's very difficult to tell when the market is about to take a big turn. If your fixed-income portfolio doesn't have enough duration, it isn't then able to provide you the counterbalance to equities. [When the economy weakens, stock prices typically fall and bond prices rise]. We're not able to project market downturns with great accuracy. So you need to have your portfolio set up throughout time so your bond portfolio can provide diversification to equities.

What is your suggestion for getting back to a more intermediate-duration profile? Vanguard Core Bond ETF or Vanguard Core-Plus Bond ETF are both actively managed strategies that have an intermediate duration profile.

VCRB is benchmarked against the Agg and invests across the broad market in a way that's very high quality so that those bonds should earn healthy income for their investors, but also still will provide protection if we were to enter a recession or an economic downturn.

The Core-Plus fund, is that a higher income version? Core-Plus, in our view, is for clients who want more return. They want to take a little bit more risk and give our active team more flexibility. We actually use a different benchmark than the Agg. We use the Bloomberg U.S. Universal Index, which incorporates more credit risk. Then we will seek to outperform that benchmark. It has bigger allocations to emerging markets. It incorporates high-yield corporate bonds, which are below investment grade and thus not included in the Agg.

We spoke about interest-rate risk, but what about credit risk? Should investors take more? Considering that high-quality credit is giving you a really attractive yield of over 5%, we tend to like to be higher in credit quality.

We are in a market where the yield spread over Treasuries across various credit asset classes is pretty compressed relative to history. That makes our team a bit cautious, just because you're not getting paid that much for taking on additional risk. For example, you don't get paid that much more moving from investment grade to high-yield bonds, which have significant risk differences.

What if an investor needs income? Where should they turn? If you are a client or an investor who needs higher income in your portfolio, we don't think that you should totally shy away from high-yield. It can provide great yield and has more defensive characteristics than equities.

High-yield today is offering more than 7% yield. And relative to history, the high-yield space is much higher quality today than in the past. There are fewer triple-C-rated credits in the benchmark, for example.

We also view the fundamentals of high-yield credit as still reasonably attractive. So we don't think that that part of the market is primed to see a bunch of default activities or significant losses for its investors.

What's the right allocation, and how should advisors add it for the right clients? In terms of total below-investment grade debt in the Universal Index, there is 7%. That's pretty low. About 4% of that is high-yield corporate bonds, and then the rest would be emerging markets.

We see a lot of advisors use a very high-quality core ETF, like VCRB, and then build around it, maybe adding a small allocation to high-yield corporate bonds or buying an emerging market debt fund. And we've heard a lot about private assets being a part of investor portfolios. There could be a combination of these products there.

Another approach is our multisector income products. There is a mutual fund, and we also have Vanguard Multi-Sector Income Bond ETF. In addition to corporate bonds, our team will allocate to emerging market bonds, structured securities like asset-backed securities and commercial mortgage-backed securities, bank loans, and CLOs [Collateralized Loan Obligations]. The yield to worst [a measure that takes into account the risk of bonds getting called early] on that portfolio today is 5.93%.

What about munis? Usually what we find is investors in a high tax bracket use the taxable funds in a retirement account and munis in a taxable account. If they are looking for tax-free income, they may have the biggest allocation to something like the Vanguard Core Tax-Exempt Bond ETF. It would take the place of an active taxable core fund.

We have a new Federal Reserve chair in Kevin Warsh. Do you expect big changes coming? We are in an interesting position with the Fed. Market expectations are that the Fed may need to re-engage in hikes, but in our view, we think that the Fed can be patient right now. Two-year treasuries are above 4.1%, which is pretty attractive if you don't expect the Fed to hike near term. So we think investors are very well compensated on that part of the yield curve. A fund to consider among our ETFs would be the Vanguard Short Duration Bond ETF (VSDB).

This advice seems to conflict with what you were saying about taking more duration risk at the start of our interview. Here's the way to thread the needle between these ideas: We think this is a great time, given where yields are today and the attractive fundamental picture of bonds, for investors to reallocate toward their long-term strategic bond allocations. For a lot of investors, that is something more like a core duration.

However, given the volatility, the uncertainty, and a lot of headline risk this year, we know a lot of investors are still hesitant to take on the level of interest-rate risk that comes with a core allocation. For those investors, there is more comfort in moving toward something that has a little bit of duration but doesn't quite take on an Agg level of interest-rate risk.

Short-term bonds wouldn't be our lead recommendation or where we put long-term allocators, but it's an attractive market opportunity that has kind of come up in the last couple of weeks given all the changes at the Fed.

How long have you been at Vanguard? This was really the start of my career and just two days ago, I hit my 10-year anniversary.

Happy anniversary, and thanks, Rebecca.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

July 23, 2026 14:15 ET (18:15 GMT)

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