According to recent research, Vanguard, the second-largest asset manager in the world, raised exposure to major bank bonds amid the banking crisis in March by taking advantage of low valuations.
The failure of two smaller banks in the United States last month caused wild price swings across the fixed-income markets, with concerns about the banking industry having a significant impact on corporate bond prices.
“The banking troubles offered a brief window to add large banks at compelling valuations,” the research by Sara Devereux, global head of fixed income group, and her team stated.
“We had little exposure to troubled banks and do not see evidence of a systemic risk to the financial system,” the statement read.
Vanguard anticipates continued bond market volatility in the months to come, which may offer more opportunities to acquire oversold debt securities, but it is still wary of increasing risk in its bond portfolios given its expectation that the economy would experience a recession this year.
“The time for a full risk-on moment has not yet arrived,” the report stated.
Because banks are anticipated to become more cautious and restrict lending, last month’s bank failures have increased fears of an economic slowdown.
After a widely anticipated 25 basis point increase at its next rate-setting meeting in May, investors are now evaluating whether the Federal Reserve will continue raising rates to combat inflation. Many anticipate that the central bank would reduce interest rates later this year to loosen the economy’s grip on higher borrowing costs.
Vanguard predicts that core inflation would be sticky, limiting the Fed’s capacity to loosen monetary policy in the upcoming quarters.
The Fed will eventually raise the Fed funds rate above 5% by mid-year before pausing, according to the report.
We believe the Fed will keep policy rates high for a longer period of time than the market presently anticipates, barring a significant economic surprise.
