Yield surge in ‘risk-free’ treasuries has bond investors on high alert

U.S. Treasuries generally hold a special place in an investor’s portfolio – the asset class against which all other market risks are measured. But the rise in long-term returns is forcing investors to rethink this assumption.

yield on 10 years treasure It recently rose to a level it hasn’t seen in over a year. 30-year treasury return This week it reached a level not seen since 2007, just before the financial crisis. The moves stem from geopolitical conflict and an oil price shock that has reignited inflation and have led to a growing consensus that the Fed will not cut rates at its next meeting for the first time since new Fed Chairman Kevin Warsh was confirmed by President Trump’s order to cut rates. In fact, traders are currently betting that this will happen no interest rate reduction We see that the possibility of an interest rate increase increases in the remainder of 2026. Warsh was being sworn in by Trump on Friday.

The shift in bond market assumptions is a wake-up call for investors in the asset class that has long been called a “safe haven” because of bonds’ predictable income and guaranteed return to maturity. HSBC wrote in a note this week that US Treasuries are now in the “danger zone.”

On Friday, the US 10-year treasury yield rose to 4.57% and the 30-year treasury bond rose to 5.08%.

BondBloxx Investment Management senior investment strategist JoAnne Bianco expressed similar concerns on CNBC’s “ETF Edge” podcast this week. “You call it a risk-free interest rate. It’s not risk-free. There’s a lot of risk associated with it,” he said.

“The next possible action now is that they will increase rates at some point, potentially starting later this year,” he said.

The bond market action led Bianco to offer two pieces of advice for fixed income-focused investors. While higher yields provide investors with more income, they also penalize bond prices. Bianco recommends investors focus on the middle part of the treasury curve, particularly the 5- to 7-year range. He said this part of the bond market allows investors to “step into these higher rates” without the price swings that penalize long-term bondholders.

He also recommends that investors look at opportunities in the bond market that reflect the underlying strength of the U.S. economy and corporate gains in investment grade and high-yield markets. While it’s true that corporate bond spreads are tight, “they’re tight for a reason,” Bianco said.

Corporate fundamentals and recent earnings are strong, and many companies in both the investable and high-yield markets have issued positive guidance.

Bianco added that investment-grade BBB-rated companies stand out as the best opportunities and this is nothing new. In almost every period, the “coupon income advantage you get from BBB bonds” has led to outright outperformance against both the broad US corporate index and the US aggregate bond index. In corporate bonds, income is the dominant determinant of total return, and BBBs carry a yield premium over higher-grade investment-grade bonds.

The income premium comes with a higher degree of default risk, but while default risk is something investors should always be aware of, he said the current market environment does not suggest to him there is a reason for increased concern at this point in the economic cycle. He says that because issuer fundamentals are strong now, investors are receiving a premium to income “without a significant increase in default risk,” which many assume comes with the territory.

He noted that although default risk in the BBB segment of the investment grade market is higher than AAA, it has been very low at less than 0.3% over the last 30 years.

Meanwhile, the high-yield market, where yields are as high as 12%, currently features strong average credit quality as well as strong corporate earnings and business fundamentals from issuers. Bianco noted that many issuers are focusing on leverage ratios and interest coverage, and the market is focusing on refinancing rather than M&A and leveraged buyout issuance, with the latter shifting more to the private side of the bond market.

“The market is open to companies refinancing, and we expect defaults for the remainder of the year to be well below the long-term average,” Bianco said. he said.

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