Vanguard Increases Treasury Holdings as Iran Conflict Drives Up Yields

Vanguard Boosts Treasury Holdings as Yields Rise Following Middle East Conflict

Vanguard, a leading asset manager, is increasing its holdings of Treasuries, capitalizing on higher yields in the aftermath of the Middle East conflict. The firm is locking in rates and hedging against potential growth slowdown risks. In its latest quarterly outlook, Vanguard's active fixed-income group stated that it has been adding exposure to longer-rated bonds as 10-year yields rose above their estimated "fair-value" range of 3.75% and 4.25%. The benchmark rate has climbed more than 30 basis points to around 4.3% since late February, driven by the Iran conflict and its impact on oil prices and inflation concerns.

The benchmark rate's increase has created attractive levels for Vanguard to extend the duration of its portfolios and build greater resilience against potential growth risks. Vanguard's global head of fixed income, Sara Devereux, noted that her team stepped into the market after some of the pressures in the energy market eased, reducing the risk of extreme scenarios for central bank policies. The recent two-week ceasefire between the US and Iran has led to a pullback in crude oil prices, which have remained volatile since trading above $110 a barrel in early April.

The conflict has also led to a diverging path in global monetary policy, opening up relative-value opportunities across regions. Vanguard favors German bonds over US Treasuries, citing the US economy's insulation as a net energy exporter. The firm remains underweight Japanese government bonds, citing fiscal and monetary policy risks. In its view, the Federal Reserve will deliver one rate cut this year, a scenario that hasn't been fully priced into the interest-rate swaps market.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

In credit markets, Vanguard continues to favor investment-grade bonds, pointing to solid fundamentals, strong demand, and yields above 5%. However, the firm sees wider dispersion across sectors and issuers, suggesting investors need to be more selective. Vanguard notes that while credit performance last year was characterized by a rising tide that lifted all boats, this year has been more of a bond pickers market.

Note: Vanguard's specific holdings and changes are not provided in the original article. The table above is a representation of the information available.