The sharp global bond sell-off is creating increasingly compelling opportunities for fixed-income investors, with Schroders arguing that much of the known risk surrounding growth, inflation and further US Federal Reserve tightening is already reflected in current valuations.
In its latest US bond market update, Schroders said investors could consider modestly adding duration, particularly in the two- to five-year segment, while selectively increasing exposure to agency mortgage-backed securities and emerging-market debt.
The 10-year US Treasury yield touched about 5.25%, its highest level since 2007, while the 30-year yield reached around 5.60%, the highest in more than two decades.
The sell-off has been driven by stronger-than-expected economic growth, firmer Purchasing Managers’ Index readings, higher oil prices, fiscal concerns and expectations of additional Fed tightening.
Markets are now pricing close to four further quarter-point rate increases following September’s hike, implying a terminal policy rate near 5%.
Schroders said that looks aggressive given emerging weakness in more cyclical parts of the economy, particularly housing and spending among lower-income consumers.
Sell-Off Driven More By Real Yields Than Inflation Fears
The asset manager said an important distinction is that much of the rise in Treasury yields reflects higher real yields and expected policy rates, rather than a material loss of confidence in the long-term inflation outlook.
That suggests the move is not primarily being driven by a de-anchoring of inflation expectations.
Bond-market volatility has nevertheless risen sharply, while equity volatility remains relatively subdued.
Schroders also noted that the sell-off has become increasingly technical and momentum-driven. Cash Treasury demand appears broadly stable, while much of the recent weakness has been concentrated in futures markets as trend-following investors added to bearish positions.
The pattern, it said, increasingly resembles the acute phase of the 2023 bond sell-off, when volatility widened sharply before the market reversed.
Current Carry Provides Bigger Cushion
Schroders said current yield levels provide investors with a meaningful income buffer even if rates remain elevated.
With two-year Treasury yields close to 5%, it estimated yields would need to rise above roughly 7.5% over the next year for an investor to suffer a negative total return, assuming a broadly comparable maturity.
The firm also questioned whether a terminal policy rate near 5% is sustainable against core inflation of around 3%, particularly as stresses emerge in housing and among lower-income households.
It said markets may also be treating several current headwinds — including high energy prices, strong corporate earnings, AI-related investment, resilient growth and fiscal deterioration — as permanent.
If some of these pressures ease, sentiment towards fixed income could turn quickly.
Global Sell-Off Extends Beyond Treasuries
The rise in yields has not been confined to the US.
Schroders noted that 10-year German Bund yields have risen to about 3.65%, the highest since 2009, while 10-year Japanese government bond yields have reached around 3%, a level not seen in roughly three decades.
UK gilt yields have similarly climbed to their highest levels since 2008.
The common drivers include stronger growth, higher energy prices, increased government borrowing and heavy capital spending requirements related to AI and infrastructure.
Fixed Income Case Strengthening
Schroders remains constructive on agency mortgage-backed securities, where recent underperformance and higher rate volatility have improved valuations.
It also continues to favour selected emerging-market debt in both local and hard currencies, while stressing greater selectivity in corporate credit because spreads remain tight and issuance elevated.
Overall, Schroders said the strategic case for fixed income is strengthening as nominal and real yields rise to levels not seen in years.
While rates may remain under pressure in the near term, the firm said current valuations suggest investors should be looking to own more fixed income, not less, particularly as negative sentiment becomes increasingly embedded in prices.
