US treasury bonds often occupy a special place in an investor’s portfolio – the asset class against which all other market risks are measured. But rising long-term yields are forcing investors to rethink this assumption.
The harvest on the 10 year treasury has recently grown to a level not seen in more than a year, while the The 30-year treasury yield this week reached a level not seen since 2007 – just before the financial crisis. The moves were driven by geopolitical tensions and an oil price shock that revived inflation and led to growing consensus that the Federal Reserve would not cut rates at its next meeting, the first since new Fed Chairman Kevin Warsh was assured of authority from President Trump to cut rates. In fact, traders are now betting that interest rates will not be cut for the remainder of 2026, and that rate hikes are likely to increase significantly. Warsh was sworn in by Trump on Friday.
The shift in bond market forecasts is a wake-up call for investors in an asset class that has long been called a “safe haven” because of bonds’ predictable income and guaranteed return relative to maturity. HSBC wrote in a note this week that US stocks are now in “dangerous territory.”
On Friday, the 10-year U.S. Treasury yield was at 4.57% while the 30-year Treasury bond rose to 5.08%.
CHICAGO – MARCH 28: Traders in the 10-year Treasury Note options pit at the Chicago Board of Trade signaled more activity following the Federal Open Market Committee’s announcement that it was raising short-term interest rates by another .25 percent on March 28, 2006 in Chicago, Illinois. Trading in the pit has been intense in the moments leading up to this announcement. The increase was the 15th consecutive increase by the Fed and the first since Ben Bernanke took over as chairman of the FOMC.
Scott Olson | Getty Images News | Getty Images
JoAnne Bianco, senior investment strategist at BondBloxx Investment Management, expressed similar concerns on CNBC’s “ETF Edge” podcast this week. “It’s calling it a risk-free rate. There’s no risk. There’s a lot of risk associated with this,” he said.
“Now the next thing that is likely to happen is that they will raise prices at some point, which will probably start later this year,” he said.
The bond market’s action leads Bianco to make two recommendations for income-oriented investors. While higher yields give investors more money, they also penalize bond prices. Bianco suggests that investors focus on the middle part of the wealth curve, especially the 5 to 7 year range. That part of the bond market allows investors to “get into these higher levels” without the price volatility that has punished bondholders in the past, he said.
He also recommends that investors look for opportunities in the bond market that reflect the underlying strength of the US economy and corporate earnings within the investment grade and high yield markets. While it’s true that corporate bonds are strong, Bianco said, “they’re strong for a reason.”
Business fundamentals and recent earnings are strong and many companies in both the investment grade and high yield markets have issued positive guidance.
Within the investment grade, Bianco says BBB-rated companies stand out as the best opportunity, and that’s nothing new, he added. Over almost any period, the “coupon income yield on BBB bonds” has driven the outperformance relative to both the broad index of US companies and the US aggregate bond index. For corporate bonds, income is the main driver of total return and BBBs carry a yield premium over higher rated investment grade bonds.
The income premium comes with a higher level of default risk, but he said that while default risk is an issue investors should always be aware of, the current market environment does not suggest to him that there is cause for high concern at this point in the economic cycle. With strong issuer fundamentals right now, he says investors are getting premium income “without the increased default risk factor” that many think comes with the field.
He noted that the default risk in the BBB segment of the investment grade market, while higher than AAA, is very low – less than 0.3% over the past 30 years.
The high-yield market, on the other hand, where yields reach 12%, currently features strong average credit quality, as well as strong corporate earnings and business fundamentals from issuers. Bianco noted that many issuers are focused on their valuations and interest rates, and there is more focus on refinancing the market than speculation on M&A and more issuance of purchases, and the latter have moved more to the private side of the bond market.
“The market is open for companies to finance and we expect defaults to be below the long-term average throughout the year,” Bianco said.
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