Vanguard Eyes Non-US Markets to Hedge High-Grade Debt Exposure

Arvind Narayanan Source: Vanguard

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(Bloomberg) — Vanguard is looking at overseas markets to help hedge exposure to US investment-grade corporate debt, as elevated valuations and expectations of higher supply leave the market vulnerable to repricing if conditions unexpectedly weaken.  

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This year has seen a record start to bond sales both in the US and globally, and analysts and investors alike are expecting a rush of issuance by so-called hyperscalers to fund massive capital-spending plans. Meanwhile, spreads for high-grade notes are historically tight amid strong demand.

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But a sudden change in economic conditions could make absorbing anticipated debt sales more challenging, said Arvind Narayanan, senior portfolio manager and head of investment-grade credit at Vanguard.

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“If there is broader macro weakness, broader hiccups in the market, then US IG could underperform because investors are full,” he told Bloomberg News. “That’s the thing to be careful about here.” 

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To counter any economic shock that could hit the notes’ valuations, Vanguard is eyeing different geographies such as Canada and Europe. “One of the key things that we’re looking at is truly diversifying the portfolio, so we’re looking really at global markets,” said Narayanan.

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The world’s second-biggest asset manager is also weighing the use of insurance strategies like credit default swaps and increasing the interest rate sensitivity of portfolios in anticipation of eased US monetary policy. 

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Traditional defensive strategies like boosting exposure to the debt of higher—rated companies that would better withstand an economic slowdown could be less effective at this time because of anticipated issuance by tech firms, according to Narayanan. 

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“What that does is reprice other high-quality issuers as well,” he said. “So hiding up in quality in times of uncertainty may not necessarily play out well this go-around.” 

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Meanwhile, Vanguard isn’t indiscriminately buying AI-related debt and is scrutinizing companies that may be disrupted by the technology.

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“We want to make sure we have a diversified portfolio that can win across multiple market scenarios and especially as it relates to the adoption of AI,” Narayanan said. “We’re very mindful that we don’t want our portfolio to be all about just one trade.”

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