While the long-term bond Morningstar Category posted solid returns for the year to date through June 2025, investor sentiment told a different story. The category experienced more than $9 billion in net outflows during the same period, signaling a growing disconnect between performance and investor behavior.
President Donald Trump’s tariff war spurred a selloff in bonds in April as economists raised inflation estimates. Despite the volatility, the 10-year Treasury yield remained below its trailing five-year high at the end of the month. Still, the sharp rate movements have created a challenging backdrop for long-term bond investors.
Long-term bond funds were up 2.7% for the year through March—among the top-performing taxable bond categories—but they lost 4.6% between April 2 and April 11 as the 10-year Treasury yield surged in response to rising inflation expectations. By the end of April, the category was down 1.1% for the year, making it one of the worst performers for the month.
While they can serve as effective diversifiers to equities, the elevated interest rate sensitivity can result in a very bumpy ride. In fact, over the trailing three years ended June 2025, the 14% standard deviation of long-duration funds was nearly the same as the S&P 500’s.
The outflows reflect a broader trend of investors moving to the sidelines or reallocating to shorter-duration strategies, even as long-duration strategies have performed well over longer periods. Until there’s more clarity on inflation and policy direction, volatility and skepticism may continue to overshadow the strong returns seen earlier in the year.
Let’s look at two Vanguard funds that may go against the grain.
Vanguard Long-Term Investment-Grade VWETX primarily holds investment-grade corporates, with modest exposure to taxable municipals and Treasuries. It maintains a longer duration than most long-term bond category peers.
Two seasoned subadvisor teams drive this strategy: Wellington Management oversees 75% of assets, while Vanguard’s fixed-income group manages 22%, though allocations are expected to become more equal over time. Scott St. John has been at the helm since 2014, leveraging Wellington’s robust fixed-income resources. On the Vanguard side, Arvind Narayanan draws on a 30-plus-member investment-grade sector team. Both firms feature deep research capabilities. Wellington employs rigorous credit analysis and proprietary models, while Vanguard’s process, shaped by its senior investment committee, allows managers and analysts to adapt to risks and opportunities.
The portfolio’s higher-quality bias means the fund, which has a Morningstar Medalist Rating of Silver, has held up better than peers when credit markets get rocky.
Silver-rated Vanguard Long-Term Corporate Bond Index VLTCX pairs credit market exposure and cost efficiency, making it well-suited for long-term investors seeking investment-grade corporate-bond exposure. The fund tracks the Bloomberg US 10+ Year Corporate Index and targets US-dollar-denominated, investment-grade corporate bonds with maturities of at least 10 years. By mirroring the index’s market-value weighting, the fund reflects the structure and risk profile of the long-term corporate debt market while keeping turnover and transaction costs low.
Vanguard’s fixed-income index team uses a global network of portfolio managers, sector specialists, and traders to achieve tight index tracking. The lead managers collaborate with exchange-traded fund experts, a data team that handles index changes and corporate actions, and international professionals who manage non-US exposure and control costs. Vanguard continues to build out its quantitative capabilities and recently introduced an optimization tool that integrates liquidity data with trader input.
This article first appeared in the June 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.
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