The sharp sell-off in global bonds is creating attractive tactical and medium-term investment opportunities, particularly in 10-year US government bonds, as markets may be pricing in more Federal Reserve tightening than ultimately materialises, according to market strategist Rajat Bhattacharya.
In a market commentary, Bhattacharya said the surge in US Treasury yields during September had significantly improved the risk-reward profile of 10-year government bonds for investors with a six- to 12-month horizon.
The US 10-year yield rose more than 50 basis points in September, its biggest monthly increase since 2022, and has climbed about 115 basis points this year. The move reflected expectations of resilient US growth, higher Fed rates, fuel-driven inflation, artificial intelligence-related capital spending and fiscal concerns.
However, Bhattacharya said valuations are now close to fair value. Based on bond arithmetic cited in the commentary, a rise in the 10-year yield to 6% could result in losses of less than 1%, while a decline to 4.5% could generate gains of more than 10%.
Money markets are currently pricing around 85 basis points of tightening over the next 12 months, but Bhattacharya argued this may prove excessive as inflationary pressures from oil prices and tariffs are expected to ease next year.
While US labour-market and capital-spending indicators remain resilient, consumer confidence is weak, real disposable income has stagnated and households are increasingly drawing on savings to sustain spending.
Core personal consumption expenditure inflation, the Fed’s preferred gauge, also came in softer than expected at 0.2% month-on-month and 3.0% year-on-year.
Bhattacharya said one or two additional Fed hikes could still be justified if labour-market conditions remain strong, but more aggressive tightening following the sharp rise in bond yields could increase risks to financial stability.
In equities, the strategy remains focused on quality companies and sectors benefiting from the AI-led earnings cycle.
US large-cap stocks have absorbed the bond-yield increase relatively well, while small- and mid-cap equities have fallen about 8% to 9% from recent peaks as higher borrowing and energy costs weigh more heavily on them.
Bhattacharya expects AI-related investment to continue supporting semiconductors and memory, while benefits increasingly spread beyond technology and communications into financials, materials, power and electrification.
Long-term supply agreements in the memory industry are also expected to improve revenue visibility as structural AI demand extends the current upcycle.
The commentary also sees opportunities emerging in Australian dollar corporate bonds and emerging-market US dollar bonds, particularly if the US dollar and shorter- to medium-term Treasury yields peak in the coming weeks.
AUD corporate bonds offer a yield premium over comparable US credit, while a constructive medium-term view on the Australian dollar could provide additional returns for US dollar-based investors.
Gold is another area where the recent pullback is viewed as an opportunity to add exposure, supported by continued emerging-market central bank demand.
Bhattacharya identified US$4,000 an ounce as an important technical support level for gold.
Overall, the strategy favours using the recent market volatility selectively — adding duration through US Treasuries, retaining exposure to high-quality AI beneficiaries and accumulating assets that could benefit if US yields and the dollar begin to moderate.
