Vanguard’s Sara Devereux: Why It’s a ‘Terrific Environment’ for Bond Income

Key Takeaways

• Sara Devereux, Vanguard’s global head of fixed income, says bond yields are attractive and should stay appealing even after the Fed starts cutting interest rates.
• Yields are not likely to return to the rock-bottom lows of the pre-pandemic years, so fixed-income investors can earn more attractive returns from the coupon component of bonds.
• Devereux likes municipal bonds and investment-grade credit.

It’s been a wild ride in the bond market this year, but Sara Devereux, Vanguard’s global head of fixed income, believes investors are in a sweet spot for attractive yields. She says that with yields having risen from pre-pandemic lows, the potential total return on bonds (the interest payments plus price return) is appealing. At the same time, though the Federal Reserve is expected to begin lowering interest rates as soon as September, she believes yields will stay well above pre-pandemic levels.

If the economy takes a turn for the worse, a bond rally will also bring opportunities for price appreciation that can provide ballast in a broader portfolio. But if bond prices decline, the higher yield offers a cushion against losses on fixed-income holdings.

Devereux’s biggest piece of advice for investors right now: “Revisit your fixed-income allocations.” Many overlooked bonds when interest rates bottomed out and yields were ultra-low. With rates more in line with their historical norms, investors who are under-allocated should pay attention.

‘Keep Clipping That Coupon’

The Fed has held rates steady at a range of 4.25%-4.50% since December. That’s lower than the peak of the tightening cycle last summer but significantly higher than the rock-bottom levels seen between the 2008 financial crisis and the covid-19 pandemic.

Devereux expects central bankers to begin cutting rates in September and continue into 2026, though the pace of those cuts could slow. She expects the Fed to gradually reach a neutral rate somewhere between 3.0% and 3.5%. That’s “notable,” she says, because it means that “rates are going to remain somewhat elevated. We’re not going back to the zero lower bound.”

That’s also good news for bond investors. It’s “a terrific environment for the income component” of fixed income, according to Devereux, who joined Vanguard in 2019 after a 21-year stint at Goldman Sachs. As of the end of July, her team oversaw $2.6 trillion in fixed income assets.

Devereux advises investors to “keep clipping that coupon.” Unlike the price appreciation component of a bond’s return, which can be volatile, a bond’s coupon, or annual interest payment, tends to be predictable over the long term. A bond’s total return includes both factors.

Right now, Devereux says the income component of bonds is a “huge tailwind” for the asset class in general. Prices don’t have to rally and rates don’t have to drop for investors to clip a coupon. If a rally happens and rates fall, an investor’s all-in yield will rise. And if bonds sell off, “you have a huge cushion.” This wasn’t the case in 2022, when yields were close to zero. “We think it will continue to be a good environment for fixed income,” she says.

Look to the Belly of the Yield Curve

Devereux describes today’s all-in yields as “super attractive,” with investors able to capture yields around 4% in the relatively safe Treasury market rather than stretching into riskier high-yield offerings for the same return. Add in active management, and she says investors can capture an even higher return on high-quality bonds.

She says the sweet spot for investors is in bonds with maturities around five or six years. In Wall Street jargon, that’s known as “belly” of the yield curve, which is a graphical representation of government bond yields across different maturities. “We think that’s the best tradeoff between income and duration,” she explains. Duration is a measure of a bond’s sensitivity to interest rate risk. Bonds with longer maturities tend to be more sensitive to rate changes and have higher durations as a result.

Investing in the middle of the yield curve means minimizing interest rate risk on both the short and long ends. Devereux explains that investors in bonds with shorter maturities could see yields drop rapidly if the Fed cuts rates, while bonds with longer maturities are sensitive to changes in the term premium (investors’ changing demands for yield based on their perceived risk of locking away money for a longer period of time).

Another benefit of bonds right now is the price stabilization they can bring to portfolios. If the Fed cuts deeply and quickly in the event of a recession, investors could benefit from price appreciation as bond yields (and stocks) fall. “That’s why we’re trying to get people to the belly of the curve. That’s where you can get that great income. And if the Fed cuts rates, you can benefit from some of that price move,” she says. “It’s recession insurance.”

Fiscal Policy: A Big Risk for Bonds

Devereux says the biggest headwind for bond investors is the growing fiscal deficit, which she describes as “unsustainable over the long term.” Yields on 30-year Treasuries surpassed 5% in the spring as investors digested President Donald Trump’s then-draft tax bill, which was poised to add more than $3 trillion to the deficit without materially reducing spending.

“At some point, something has to give,” she says, whether it comes from spending cuts or higher revenues. Devereux says markets seem to be pricing the deficit situation fairly now—yields remained relatively stable after the tax bill passed—but a worsening fiscal picture could send the term premium higher and stoke volatility.

How to Invest When Yield Spreads Are Tight

Also top of mind for many fixed income investors are historically tight credit spreads, meaning risky bonds aren’t offering much more yield than safer ones and investors are accepting less compensation in exchange for taking on more risk. “That does limit the upside,” Devereux says. Still, she cautions against taking on too much risk to capture extra return: “Don’t overstretch on tight spreads,” she says. “If you have a high fee and a fixed [benchmark], you have to take more and more risk to hit it. People start reaching for yield.”

Devereux says her team has the opposite approach: “As valuations get worse, we take chips off the table, we become more opportunistic and we lean into security selection rather than the huge beta swings. And then when spreads go out again, we’re ready because we have the dry powder.” At the same time, she pairs credit portfolios with an overweight duration position in the belly of the yield curve, because spreads often widen when Treasury yields are falling. “We use that as a hedge, and investors can do that too,” she says.

Opportunities in Fixed Income

Devereux says first and foremost, investors should focus on making sure they have some allocation to the bond market: “Indexing is a great starting point. If you’ve forgotten, if you’re under-allocated, just get [bonds] in there.” For investors who want to go a step further, “the opportunity set in active [management] is very strong,” thanks to high volatility and wide dispersion when it comes to valuations.

Devereux likes municipal bonds, which are of “very high quality” and also inexpensive. She is also a fan of investment grade credit, where all-in yields are attractive and managers can find idiosyncratic opportunities among individual firms.

Heading into 2026, Devereux is looking beyond tariffs. “There are other legs to this policy stool,” she says—namely, tax cuts and deregulation. “Both of those are growth-positive.” She expects the benefits of those two forces to work their way through the economy starting next year. Though vulnerabilities and uncertainty remain, “it should be a rosier picture.”

Within investment grade, she says deregulation could give financials in particular a boost. Meanwhile, potential changes to leverage requirements for banks could support the Treasury market.

Staying Disciplined

Against all the crosswinds in today’s market, Devereux emphasizes discipline: “Discipline delivers to build a resilient portfolio.” A disciplined investment manager can help investors “optimize and harness the risk, rather than just amplify it.” She emphasizes that bonds are “not a trade,” but rather a strategic stabilizer in portfolios over time. That means investors should avoid chasing moves in rates or headlines and stick to an investment plan designed for the long run.