Is Now the Time To Load Up on Bonds? Vanguard Thinks So

• The 10-year Treasury yield stands at 4.2%, providing a premium over current inflation and marking the first time in almost a decade that bonds are earning real yields above inflation
• U.S. stocks have been overvalued according to Vanguard's CIO, with the S&P 500 up about 90% since October 2022, but the firm predicts stock and bond returns will be 'pretty comparable' over the next decade
• Recent market action demonstrated bonds' appeal as stocks fell for three consecutive days (S&P 500 down 2.5%, Nasdaq down 4.5% since Monday) while bond prices surged Thursday

Market Summary: Vanguard Advocates Increased Bond Allocation

Key Highlights

Vanguard's Chief Investment Officer Gregory Davis is recommending investors consider allocating more than 50% of their portfolios to bonds, potentially reversing the traditional 60/40 stock-bond ratio. The firm cites elevated bond yields and overvalued stock markets as primary drivers for this strategic shift.

Critical Data Points

• 10-year Treasury yield: Currently at 4.2%, marking the first time in nearly a decade investors are earning positive real yields above inflation
• 10-year yield threshold: Has remained above 4% since September 2022, when it first crossed that level since 2008
• S&P 500 performance: Up approximately 90% since the current bull market began in October 2022
• Recent market decline: S&P 500 down 2.5% and Nasdaq down 4.5% over three consecutive trading days

Market Implications

Vanguard projects comparable returns between stocks and bonds over the next decade, with Goldman Sachs analysts issuing similar forecasts a year earlier. This outlook is driven by:

1. Overvalued equities: U.S. stocks have maintained elevated valuations for an extended period
2. AI investment risks: Uncertainty surrounding artificial intelligence investment sustainability after three consecutive years of double-digit returns
3. Federal Reserve policy: Expected to continue gradually lowering rates unless inflation accelerates or employment strengthens unexpectedly

Key Risks

Primary concerns include potential Trump administration interference with Fed independence and mounting U.S. debt, though both scenarios are considered remote possibilities. The traditional 60/40 portfolio, which struggled during 2022's bear market, is experiencing renewed interest among money managers seeking safer returns.