The 10 year treasury yield climbed to near 5 percent after the Federal Reserve raised the fed funds rate to 3.75 percent to 4 percent and signaled one more increase ahead, market participants said.
Yields initially pushed above 5 percent after the announcement and were around 4.95 percent the following day, reflecting investor concern about inflation, additional bond supply tied to artificial intelligence firms, and a rising government deficit, according to fixed income strategists.
Brian Rehling, co head of global fixed income and digital asset strategy at Wells Fargo Investment Institute, said he was not sure the peak in yields had arrived and added that the Fed probably has more work to do.
Rehling advised that investors seeking total return may favor equities while yields climb, but he said income oriented buyers can find value in bonds that yield 5 percent or more because coupons cushion total returns against price declines.
What Investors Should Consider Next
Investment grade corporate bonds drew broad support for income seekers because corporate fundamentals remain strong and the economy is expected to hold up, Rehling said, though he recommended short maturities of two years or less and no more than five years for credit exposure.
Bernstein Private Wealth Management senior strategist Matthew Palazzolo described the recent rise in Treasury yields as a good entry point for income investors, and he urged buyers to consider municipal bonds for their federal tax exemption and, where applicable, state tax benefits.
Palazzolo said municipals yielding current levels offer a strong starting income and added that he favors muni portfolios with about six years duration to balance income and interest rate sensitivity.
Ulrike Hoffmann Burchardi at UBS wrote that investors should calibrate credit risk and duration to objectives and horizons, and that selectively adding duration in high quality bonds could capture price gains if tighter policy slows growth or lowers long term inflation expectations.
Goldman Sachs analyst Christian Mueller Glissmann warned that the 10 year Treasury is a focal point and that the tactical case for long dated bonds is mixed, though he said higher starting yields could lift strategic bond allocations over longer horizons.
