Advisors and investors at odds over inflation and bonds, Vanguard survey finds

There’s a growing rift between financial professionals and individual investors over inflation and the bond market - two issues that will weigh heavily on the Federal Reserve’s decision-making in the months ahead.

The Vanguard survey, published today (9/12), reveals that advisors are striking a more confident tone about inflation’s trajectory, while investors remain unsettled and divided. According to the data, nearly three-quarters of advisors predict that US inflation will settle between 2% and 4% over the next year, close to the Fed’s 2% target. Just 2% expect inflation to climb above 6%.

Investors see things very differently, with almost half believing inflation will push past 4%, with one in five warning it could surge beyond 6%.

Read: Inflation jumps to 2.9% in August as jobless claims surge, muddying Fed outlook

“Advisors are far more optimistic about inflation than investors,” says Xiao Xu, Vanguard investment strategy analyst. “Most advisors see inflation staying in a narrow range near the Fed target, but half of investors are bracing for sticker shock ahead.”

Advisors and investors are also split on bonds too, with most advisors anticipating 10-year Treasury bonds will deliver returns between 3.5% and 4.5% in the coming year, a view largely aligned with economists. Roughly half of investors, though, see returns falling below 3.5%, while more than a quarter expect them to top 4.5%.

Behind these forecasts lie contrasting assessments of risk. Advisors worry most about global instability (33%) and growing government deficits (24%), followed by stubborn inflation (19%) and a potential credit downturn (14%). Investors are more concerned about stagflation and recession—scenarios that could send rates in opposite directions and account for their split views on bond returns.

On economic growth, investors expect GDP to rise just 2.4% over the next year and place the odds of severe economic trouble at 8%, echoing pessimism seen during the early days of COVID-19 and the inflation surge of 2022.

“Advisor beliefs seem grounded in consensus economic forecasts and the big picture of macro risks,” says Andy Reed, Vanguard’s head of behavioral economics research. “But investor views on fixed income are all over the map, reflecting deepening economic anxiety.”

The differing opinion is also impacting portfolio construction, the survey reveals.

Over the past three years, 41% of advisors increased fixed income allocations, with many planning to hold or expand their positions, but just 8% of investors raised their exposure to bonds. Vanguard researchers say that reluctance highlights the inertia many households face when adjusting portfolios, even as advisors emphasize the need to rebalance.

Looking ahead, advisors see opportunities in sectors such as high-yield debt, investment-grade corporates, municipal bonds, and structured products, all areas they believe can still offer attractive yields if rates begin to decline.

“With rates likely trending lower, advisors’ focus is likely shifting toward sectors still offering premium returns,” Xu notes.