Vanguard bullish on US credit despite tariff risks still on the horizon

Core Viewpoint - Vanguard is optimistic about corporate bonds despite high valuations, anticipating that potential risks from tariffs could be mitigated by further interest rate cuts from the Federal Reserve [1][5]. Group 1: Corporate Bonds and Credit Spreads - Investment-grade credit spreads have decreased to 74 basis points, the lowest since 1998, as investors seek higher yields compared to U.S. Treasuries [2]. - Vanguard's global head of fixed income stated that while credit valuations are stretched, they are justified due to healthy fundamentals, attractive yields, strong investor demand, and low recession risk [3]. Group 2: Economic Outlook and Tariffs - Vanguard estimates that one-third of the impact from President Trump's tariffs has already affected the economy, with half expected by year-end and the remainder by 2026 [4]. - The slow implementation of tariffs has allowed the economy to adjust, although risks to growth and inflation remain [4]. Group 3: Federal Reserve and Interest Rates - The Federal Reserve recently lowered interest rates by 25 basis points to a range of 4%-4.25%, with expectations of further cuts potentially bringing rates to around 3% by the end of 2026 [5]. - The firm believes that additional rate adjustments and Trump's policies, including tax cuts and deregulation, will likely counterbalance the negative effects of tariffs on U.S. growth [5]. - However, there is a caution that the Fed may not cut rates as much as the market anticipates unless a recession occurs [6].