Episode summary
The Long View: Sara Devereux - Bonds Are Still Ballast
The Long View
· · Guests: Sara Devereux
Summary
Sara Devereux argues that bonds are still ballast because higher starting yields have restored income and given fixed income the ability to cushion equity drawdowns. She says 2025 showed that clearly: bonds delivered income, helped absorb volatility, and benefited from Fed cuts as inflation eased. Looking ahead to 2026, she expects returns to be more income-driven than price-driven, with yields rangebound and the labor market the key downside watch item.
She also says Vanguard has rebuilt its fixed-income franchise around active management, ETFs, talent, and technology. The firm now has an “alpha waterfall” that prioritizes repeatable sources of excess return such as security selection and data-driven signals, while using lower-information strategies like duration trades only opportunistically. She says ETFs are the preferred wrapper for many investors, and active fixed-income ETFs are growing quickly because Vanguard can combine scale, low cost, and an established trading ecosystem.
On risks, Devereux points to tight credit spreads, compressed compensation for moving down in quality, growing private credit, and the potential for AI-capex-related issuance to pressure spreads in the near term. She remains constructive overall, citing supportive policy tailwinds, strong demand for fixed income, and a market structure that still rewards patience and quality.
Key takeaways
- Sara Devereux says bonds have regained their diversifying role because higher yields now provide both income and a cushion against losses.
- Vanguard has shifted further toward active fixed income and active ETFs, which she says fit the firm’s low-cost, high-scale model.
- She says the highest-quality alpha comes from repeatable levers like credit security selection and data-driven signals, not from aggressive duration bets.
- Devereux says private credit offers yield and diversification, but the illiquidity premium has compressed and credit resilience remains a watch item.
- She expects 2026 fixed-income returns to be driven more by income than price appreciation, with labor-market weakness the main macro downside risk.
Notable quotes
“we call it our active edge our philosophy centers on really consistency over the long term”
“We use what we call an alpha waterfall. At the top of the alpha waterfall are those strategies that are the most repeatable and reliable”
“bonds did exactly what investors count on them for, right? They provided income and they provided stability”
“we do believe that bonds are an effective diversifier to equities. It doesn't hold every minute of every day, but it holds over the long run”
How the episode opens
Please stay tuned for important disclosure information at the conclusion of this episode. — Welcome to the long view. I'm Ben Johnson, head of client solutions for Morning Star. — And I'm Christine Benz, director of personal finance and retirement planning for Morning Star.
Today's guest on the Long View is Sarah Devero. Sarah is the chief investment officer of Vanguard Capital Management and global head of fixed income. She oversees the investment professionals responsible for portfolio management, trading, and research for Vanguard's internally managed fixed income funds and ETFs, including actively managed bond and money market portfolios and bond index portfolios.
Before joining Vanguard in 2019, Sarah was a partner at Goldman Sachs where she spent over 20 years in mortgage back securities and structured products trading and sales. Earlier in her career, she worked at HSBC in riskmanagement advisory and interest rate derivative structuring. She started her career as an actuary at AXA equitable life insurance.
Barons has named Sarah to its annual list of the 100 most influential women in US finance every year since 2022. Sarah, welcome to the long view. Thank you for joining us today.
It's great to be here. Thanks for having me. — Sarah, I want to begin by asking you now that you've been at the helm of Vanguard's fixed income group for nearly 5 years. Let's start there. Can you talk a little bit about over the course of the past five years, the evolution of the team under your leadership, how you've navigated the various market environments we've experienced over that span? You maybe a bit about what's changed and where you see things headed.
Sure. Uh maybe I'll start with just what brought me to Vanguard. I'm often asked that question and what I usually say is, you know, I took the call because of the firm's reputation.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- bonds as ballast
- fixed income outlook
- credit risks
- active vs etf management
- term premium dynamics
Companies and tickers mentioned
- Vanguard
Watch the episode
Watch “The Long View: Sara Devereux - Bonds Are Still Ballast” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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The Long View, this episode and its artwork belong to Morningstar, Christine Benz - Director of Personal Finance and Retirement Planning, Ben Johnson - Head of Client Solutions, Amy Arnott - Portfolio Strategist. Octagon is not affiliated with the show; this page is an independent summary.
