Vanguard's latest research note suggests that interest rates will remain elevated over the coming decade, marking a significant shift from the low-rate environment that prevailed before and through the COVID-19 pandemic. This outlook is largely influenced by factors such as an aging population and rising structural deficits, which it says will put upward pressure on rates in the years ahead.

After holding interest rates at or near zero through the pandemic, global central banks went on rate-hiking cycles over the next four years to combat runaway inflation. Monetary policy easing began in earnest last year after progress on inflation, and the U.S. Federal Reserve also began to cut interest rates in September 2024.  

Vanguard believes interest rates will still stay above pre-pandemic levels, with the federal funds rate likely to remain above 4% in both positive and negative economic scenarios.

“In the positive scenario, the 4% rate reflects higher economic growth. In this scenario, the yield curve may remain flatter than some think, creating opportunities for active risk-taking along duration. There may be similar dynamics around credit as well,” Vanguard’s global chief economist Joe Davis said.

“In the pessimistic scenario, it indicates growing structural deficits and financing pressures on the U.S. government. There may also be greater inflationary pressure in this scenario,” Davis added. This environment according to Vanguard could lead to rising rates and a steeper yield curve, presenting different opportunities for risk-taking.

In both scenarios, Vanguard highlights that higher interest rates will shift the dynamics of investment returns. Within the bond market, investors could find value in corporate bonds, including high-yield options, as opposed to U.S. Treasuries. If concerns grow over the sustainability of the national debt, Treasury prices could face downward pressure, making corporate bonds a potentially stronger choice for fixed-income investors. 

For investors looking to keep a closer pulse on rates and the bond market, they may choose to further analyze specific exchange-traded funds. See some noteworthy funds below:

Treasury ETFs: (TLT), (TLH), (IEF), (IEI), (SHY), (SGOV), (SCHO), and (BIL). 

Bond ETFs: (AGG), (BND), (VCIT), (MUB), (MBB), (JNK), (LQD), (HYG), and (TIP).