U.S. Treasury securities typically hold a special place in an investor’s portfolio and are the asset class against which all other market risks are measured. But a surge in long-term yields is forcing investors to reconsider this assumption.
The 10-year Treasury yield recently rose to levels not seen in more than a year, but this week the 30-year Treasury yield reached its highest level since 2007, just before the financial crisis. The move comes as geopolitical conflicts and oil price shocks have reignited inflation, leading to a growing consensus that the Federal Reserve will not cut interest rates at its next meeting, the first since new Fed Chairman Kevin Warsh was authorized by President Trump to cut interest rates. In fact, traders are now expecting no rate cuts for the rest of 2026, with an increasing chance of rate hikes. Warsh was sworn into office by President Trump on Friday.
The shift in bond market assumptions is a wake-up call for investors in this asset class, which has long been referred to as a “safe haven” because of its predictable income and guaranteed returns to maturity. HSBC wrote in a note this week that U.S. Treasuries are currently in “danger waters.”
On Friday, the 10-year Treasury yield rose to 4.57% and the 30-year Treasury yield rose to 5.08%.
CHICAGO – MARCH 28: On March 28, 2006 in Chicago, Illinois, traders in 10-year Treasury options indicated increased offering activity at the Chicago Commodity Exchange Commission after the Federal Open Market Committee announced it would raise short-term interest rates by an additional 0.25 percentage point. Market trading was briefly volatile in the moments leading up to the announcement. This is the 15th consecutive rate hike by the Fed and the first since Ben Bernanke became FOMC chairman.
Scott Olson | Getty Images News | Getty Images
Joan Bianco, senior investment strategist at BondBloxx Investment Management, expressed similar concerns this week on CNBC’s “ETF Edge” podcast. “You call this a risk-free rate, but it’s not risk-free. There’s a lot of risk involved in this,” he said.
“The next likely move would be to raise rates at some point, potentially starting later this year,” he said.
The bond market movement has led Bianco to issue two recommendations for bond-focused investors. Higher yields allow investors to earn more, but they also reduce bond prices. Bianco suggests investors focus on the middle part of the Treasury curve, specifically the five- to seven-year range. This part of the bond market allows investors to “enter at these higher rates” without the price fluctuations that plague holders of long-term bonds, he said.
He also encourages investors to focus on opportunities in the bond market that reflect the strength of the U.S. economy and corporate earnings in investment-grade and high-yield markets. While it’s true that corporate bond spreads are narrow, Bianco said, “There’s a reason they’re narrow.”
Company fundamentals and recent earnings have been strong, with many companies in both investment grade and high-yield markets issuing positive guidance.
Bianco said BBB-rated companies stand out as the biggest investment opportunity within the investment grade, adding that this is nothing new. In almost every period, the “coupon income benefits from BBB bonds” have completely outperformed both the U.S. Broad Corporate Index and the U.S. Aggregate Bond Index. With corporate bonds, income is the primary driver of total return, and BBB carries a yield premium over higher-rated investment grade bonds.
Income premiums come with higher default risk, but he said that while default risk is something investors should always be aware of, he doesn’t believe the current market environment gives rise to any reason for concern at this point in the economic cycle. Issuer fundamentals are currently strong, so investors are enjoying an income premium “without the significant increase in default risk” that many assume comes with this region, he says.
He noted that while default risk in the BBB segment of the investment grade market is higher than AAA, it is very low, less than 0.3% over the past 30 years.
On the other hand, the high-yield market, where yields can reach as high as 12%, is currently characterized by high average creditworthiness, as well as strong corporate earnings and issuers’ business fundamentals. Bianco noted that many issuers are focusing on leverage ratios and interest coverage, and that the market is focused on refinancing rather than speculative M&A and leveraged buyout issuance, with the latter moving to the private side of the debt market.
“The market is open for corporate refinancing, and we expect defaults to remain well below long-term averages throughout the year,” Bianco said.
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