The Long View – Sara Devereux: Bonds Are Still Ballast

Date: February 10, 2026
Hosts: Christine Benz, Ben Johnson
Guest: Sara Devereux, Chief Investment Officer, Vanguard Capital Management & Global Head of Fixed Income

Episode Overview

This episode features Sara Devereux, Vanguard’s global head of fixed income, exploring the evolving landscape of bonds and the continued role of fixed income as a portfolio ballast. Devereux reflects on Vanguard’s mission, innovation in active management and ETFs, the impact of technology and AI, and gives an outlook on fixed income markets in 2026. The conversation is broad-ranging, covering philosophy, practical changes, new product development, sector opportunities, and macroeconomic risk factors.

Key Discussion Points & Insights

Evolution at Vanguard Fixed Income (02:20)

• Devereux’s Motivation and Early Challenges:
  Sara joined Vanguard for its mission and culture, arriving pre-COVID and witnessing market upheavals (COVID-19, Silicon Valley Bank, the “Yen Carry Trade on Liberation Day”), which tested and proved the team’s resilience.

• Mission and Strategy:

  • Vanguard’s commitment: “to give investors the best chance of investment success.”
  • Broad vision: democratize access to quality bonds—spanning active, index, ETFs, public, and future private fixed income.
  • “We want to lower the cost and complexity of doing so… bring that Vanguard effect to all of fixed income.” (Devereux, 03:29)

• Active Management & ETF Growth:

  • Lean into active management for richer opportunity sets.
  • ETF expansion, including innovative active ETFs, has been central.
  • Combining ETF and active strategies leverages Vanguard’s strengths.

• Talent and Technology:

  • Building a diverse, deep bench via internal development and selective external hires.
  • State-of-the-art tech investment across research, portfolio management, and trade execution.

• Results:

  • 23 new products launched in the past year—mostly ETFs.
  • AUM grew from $1.9T to $2.8T.
  • 98% of active funds in the lowest cost decile, $350 million returned to clients via expense cuts.
  • 85% of bond funds outperform peers over ten years: “That’s a really powerful performance and cost multiplier.” (Devereux, 06:45)

Vanguard’s Active Fixed Income Edge (06:49)

• Philosophy:

  • “People and process result in performance. Great people, great process is great performance.” (Devereux, 07:44)
  • Emphasis on a collaborative, “all-star” team—no lone “star managers.”
  • True alignment, with PMs measured on alpha, not AUM.

• Process:

  • Team specializes in a limited, focused set of 40 core funds.
  • Rigorous, disciplined approach: top-down and bottom-up, persistent risk management.
  • Prioritize “repeatable, reliable” strategies—“fanatical” focus on these via an “alpha waterfall.”

• Alpha Waterfall:

  • Structured prioritization by reliability and repeatability.
  • Top: security selection, relative value, data-driven systematic strategies (including AI/ML-driven).
  • Bottom: less reliable levers like tactical duration trading, only used opportunistically.

• Being True to Label:

  • Funds are managed to “behave as clients expect—no surprises.” (Devereux, 11:40)

Active Management – Where It Matters (19:16)

• Sectors Suited for Active:

  • High yield and lower-quality corporates: Riskier credit indices can justify an active approach due to higher alpha possibilities and valuation dispersion.
  • Structured products and areas excluded from benchmarks offer additional alpha levers.
  • “We still find plenty of alpha opportunity because of the dispersion in valuations that we’re able to monetize.” (Devereux, 20:22)

• Changes in Index Composition:

  • The “AG” (Aggregate Index) now has a much larger Treasury weight.
  • Many sectors (e.g., structured products) aren’t even included in indices, offering more flexibility for active management.

ETF Proliferation & Innovation (15:03)

• Trends:

  • ETFs now the “vehicle of choice” for many.
  • Fixed income represents only 20% of ETF assets—room to grow.
  • Active ETF growth is especially notable; over three-quarters of new 2025 fixed income ETF launches were active.
  • Vanguard is “uniquely positioned” due to long-term active management and ETF expertise.

• Criteria for Launching ETFs:

  • Strict diligence: “No alpha degradation, enough liquidity, enough transparency for secondary market trading.”
  • Only launch enduring-investment-merit products, not “flash in the pan” offerings.

Technology, Data, and AI in Bond Markets (23:39, 26:48)

• Industry-Wide Transformation:

  • Accelerating electronification and automation of bond trading enables better liquidity, price discovery, and lower costs.
  • Data explosion enables advanced analytics and decision-making.
  • ETF proliferation improves accessibility to fine segments and enables electronic portfolio trading.

• Vanguard’s Tech Strategy:

  • Three pillars: 1) Enhanced Insights (AI/ML, big data-driven signals) 2) Faster Decisions (optimization engines with portfolio and liquidity tools) 3) Optimized Execution (streamlined, data-driven trade execution).
  • Examples: ETF basket creation cut from two hours to 10-15 minutes; muni aggregator scans 4 million quotes per day.
  • Ongoing experiments: Partnership with IBM on quantum optimization.
  • “Not a substitute for our portfolio managers, but as leverage for them… always having a human in the loop.” (Devereux, 25:53)

Private Credit and Sector Evolution (21:09, 45:48)

• Private Credit Boom:

  • Grown to $2T, driven by long period of low rates and investor search for yield.
  • Illiquidity premium has compressed (from 5-6% over publics to 2%), so careful sizing/watching is warranted.
  • “You get higher return, a different risk premium in the form of liquidity, you get diversification—and so it is compelling. But… less liquid, less transparent.” (Devereux, 22:29)

• Emerging Cracks in Credit:

  • Private credit incidents have been “idiosyncratic, not systemic”—but this is the sector to watch for a turn in defaults.
  • Public high yield quality has risen; default cycles have “flushed out” weaker borrowers.
  • “Security selection matters, especially down in credit, and so we're really leaning in there.” (Devereux, 48:59)

2025 Review & 2026 Outlook for Bonds (30:19, 39:04)

• 2025: Bonds Delivered:

  • Bonds provided both income and stability.
  • Strong returns (US Core Bond Index +7%): Driven by higher starting yields/income, downside protection during equity volatility, and price appreciation as inflation fell and the Fed cut rates.

• Fixed Income in 2026:

  • Expect more income and less price appreciation; yields likely range-bound.
  • Bonds remain effective ballast, especially as starting yields provide “a head start” against potential price declines.
  • Watching term premium at the long-end closely; recent repricing and administration focus are points of stability.

Macro Themes, Policy Winds & Risks (43:51)

• Policy Crosswinds:

  • “2025 headwinds are going to be offset by 2026 tailwinds and that it will be a net positive.”
  • Less impact from tariffs expected, with fiscal and deregulation tailwinds (O-BBB fiscal policy, deregulation, continued rate cuts).

• Inflation & Labor Market:

  • Base case: inflation moderates as tariff effects roll off, though some stickiness remains.
  • Vigilant regarding labor market softness—“fragile equilibrium” could tip unexpectedly, prompting more rate cuts.

• Technical Demand/Supply:

  • Both supply (AI CapEx-driven issuance) and demand for fixed income are robust.
  • Yield curve steepening drawing investors out from cash into longer duration; Vanguard sees heavy flows going further out the curve.

Sector Spotlight: AI CapEx & Market Impact (49:02)

• Funding the AI Boom:
  • Hyperscalers’ AI investments shifting to debt issuance.
  • $400B+ in AI-related issuance anticipated in 2026, 15% of IG supply.
  • “If there’s a technical widening, we’d see it as an opportunity to add that very high quality credit.” (Devereux, 50:14)
  • Over time, this may become a signature new sector for bonds, including spillover into munis.

Memorable Quotes & Timestamps

• “We want to lower the cost and complexity... bring that Vanguard effect to all of fixed income.”
  — Sara Devereux, 03:29

• “Great people, great process is great performance.”
  — Sara Devereux, 07:44

• “We’re absolutely fanatical about prioritizing repeatable, reliable strategies.”
  — Sara Devereux, 09:21

• “Not a substitute for our portfolio managers, but as leverage for them... always having a human in the loop.”
  — Sara Devereux, 25:53

• “Bonds did exactly what investors count on them for. They provided income and they provided stability.”
  — Sara Devereux, 30:50

• “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.”
  — Sara Devereux, 33:32

• “Security selection matters, especially down in credit, and so we're really leaning in there.”
  — Sara Devereux, 48:59

• “If there’s a technical widening, we’d see it as an opportunity to add that very high quality credit.”
  — Sara Devereux, 50:14

Important Segment Timestamps

• [02:20] – Devereux’s arrival at Vanguard & vision for fixed income
• [06:49] – Vanguard’s approach to active management and the “alpha waterfall”
• [12:34] – Alpha levers for active fixed income: high-value and less reliable strategies
• [15:03] – Rise, challenges, and best practices in fixed income ETFs
• [19:16] – Where active management works best in bonds
• [21:09] – The private credit boom: risks and realities
• [24:00] – Technology’s transformation of the bond market
• [27:06] – Vanguard’s technology roadmap: specifics and alpha potential
• [30:50] – Bond market review for 2025: drivers, outcomes
• [33:30] – Bonds as ballast: historical and practical context
• [38:26] – Risks on the horizon: term premium, DC policy watch, labor market
• [43:51] – Policy crosswinds and their portfolio implications
• [45:48] – Cracks in private credit and credit sector resilience
• [49:20] – Impact of AI CapEx and sector issuance
• [51:53] – Technical flows, yield curve inversion, and investor positioning

Conclusion

Sara Devereux emphasizes Vanguard’s commitment to making bonds accessible, affordable, and effective for all investors. She describes a dynamic era powered by technology, collaborative teams, and rapidly evolving products. Despite market complexity and new risks, bonds remain a crucial stabilizer and source of opportunity—especially as income returns to “fixed income.” The conversation closes with strong themes of vigilance, innovation, and optimism about what’s next for both Vanguard and the broader bond market.