Bond Market Volatility Creates Buying Opportunities: Traders Weigh In

The U.S. bond market experienced a tumultuous week, presenting potential buying opportunities for investors, according to market strategists. The 10-year Treasury note yield surged to 4.818%, a high not seen since November 2023, fueled by concerns over the geopolitical impact of the U.S.-Iran conflict on inflation. However, the benchmark rate saw a pullback after Federal Reserve officials signaled a stance of maintaining current central bank policy. By Friday, the 10-year yield edged higher again following a surprisingly robust jobs report.

This recent climb in yields has unsettled equity market participants. The S&P 500 registered minimal gains for the week as yields ascended. Over the past month, the index has seen a slight decline, while the 10-year Treasury yield has climbed approximately 16 basis points.

Despite the market jitters, some see value emerging. Oliver Shale, U.S. investment specialist at Ruffer, commented to CNBC that the rising yields are making specific segments of the yield curve more attractive. He suggests increasing exposure to medium-term debt, such as the 10-year Treasury. "We're moving to a new regime, and to a world that's characterized by more volatile inflation dynamics, and that the forces that suppressed inflation for decades are reversing … so, on the one hand, over the long term, yields are rising," Shale stated. He added, "That's not to say that bonds will always be a bad investment, and we are actually becoming increasingly interested or convinced that duration has a role to play at protecting a portfolio, particularly in a growth slowdown."

Bond yields and prices move inversely, meaning higher yields translate to lower prices, making them cheaper to acquire. Investors can purchase U.S. 10-year notes directly via TreasuryDirect or through exchange-traded funds like the iShares 7-10 Year Treasury Bond ETF (IEF), which holds over $42 billion in assets and has a fee of 0.15%.

Gregory Faranello of AmeriVet Securities sees a significant opportunity if the 10-year yield reaches the 5% threshold or if the Federal Reserve implements a rate hike this month. The 10-year rate last touched 5% in October 2023. Current market pricing indicates a 58% probability of a quarter-point rate increase on September 16th, according to the CME Group's FedWatch tool.

"If we move another 25 basis points here [or if] we get…maybe a little north of 5%, we like that as an opportunity," Faranello, head of U.S. rates strategy at AmeriVet Securities, remarked. He advises a measured and cautious approach rather than immediate large bond purchases. "We've been advising our clients to not necessarily go in, but [to] scale in here in terms of duration," Faranello said.

Faranello also pointed out uncertainties surrounding bonds due to central banks reducing their U.S. debt purchases. Japan, a significant holder of U.S. Treasurys, has decelerated its accumulation, leading to minimal absolute growth in its holdings between 2011 and 2024, as per Brookings. This raises questions about the future demand for U.S. debt. However, Faranello believes domestic buyers could increase their purchases, even as U.S. debt expands. "Over time, we need to find a home for this debt," Faranello noted, referencing the U.S. federal debt surpassing $40 trillion this past summer. "But, ultimately, we think that …the domestic money managers in general and investors will view any further back up in yields here as an opportunity."

Investors looking to capitalize on rising yields have various options. HSBC recently identified stocks with a strong positive correlation to 10-year yields, including Apollo Global (32% correlation), Chevron (26%), Alphabet (21%), and Wells Fargo (11%).