The 30-year Treasury yield topped 5.31% last week, its highest level since 2007, before the Treasury Department stepped in with a plan to more than double its long-end bond purchases. Fixed-income strategists say the front end and intermediate part of the curve now offer the more attractive entry point, while some advisors point to non-U.S. debt as a hedge against a weaker dollar.
The 30-year Treasury bond topped 5.31% last week, its highest level since 2007. The 10-year note surpassed 4.7% over the same stretch. Bond yields move opposite to prices, and long-dated issues are the most sensitive to rate swings, a trait known as duration.
That sell-off in long-dated bonds pushed the Treasury Department to announce it would more than double the size of its government bond purchases, targeting the long end of the curve. The move offered short-term relief to the fixed-income market. Paul Olmsted, principal in fixed-income strategies at Morningstar, pointed to the national debt recently rising to $40 trillion, a flood of corporate bond issuance from hyperscalers funding artificial-intelligence buildout, and inflation worries as drivers of the move.
Yields ease at the start of the week
Yields eased on Tuesday as oil prices cooled, with the 30-year Treasury bond down more than 5 basis points to trade at 5.176%. The 10-year note fell 6 basis points to 4.643% over the same session. Yields then rose one or two basis points on Wednesday.
Strategists favor the front and intermediate curve
As long-dated Treasurys saw the sharpest yield rise, the intermediate part of the curve stayed attractive. Brad Collins, senior fixed-income client portfolio manager at Vanguard, said his team is finding opportunities across the curve but would pivot toward maturities of one to 10 years, focused on high-quality carry.
According to Collins, Vanguard's approach centers on high-quality carry: "We're focused on building portfolios from the bottom up and focused on high-quality carry." Active managers there have also been looking at the banking sector, mortgages and asset-backed securities.
Olmsted noted that core-bond duration, which tends to run intermediate term, still works as a diversification tool against a stock-market correction. He also said the 5-year and 10-year notes, along with front-end-of-curve offerings, carry compelling yield above 4% and can offer downside protection against market risk.
ETFs that fit the intermediate-duration profile include the Vanguard Core Bond ETF, which carries a 30-day SEC yield of 4.88% and an expense ratio of 0.1%, and the Baird Intermediate Bond Fund, with an SEC yield of 4.43% and an expense ratio of 0.3%.
Some advisors look beyond U.S. debt
Donald Calcagni, chief investment officer at Mercer Advisors, said there is value in looking at non-U.S. debt and non-U.S. assets broadly, given what he expects to be continued erosion in the dollar's value against other currencies. He favors a diversified approach that sticks largely to developed markets and avoids below-investment-grade issues, and he also likes preferred securities and Treasury inflation-protected securities.
Income-focused investors with a defined cash need can use liability-driven investing to lock in today's higher yields, matching bond maturities to future expenses. Calcagni said retirees can apply the same approach to hedge out future cash flows, calling it easier to do in a higher-rate environment.
Source: CNBC
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