The bond market experienced significant volatility as the 10-year Treasury yield climbed, driven by geopolitical concerns and a strong jobs report. Despite equity market jitters, strategists like Oliver Shale see emerging opportunities in medium-term debt, suggesting it’s a good time to increase exposure.
Gregory Faranello anticipates further opportunities if the 10-year yield hits 5% or the Fed raises rates, though he advises a cautious, scaled-in approach for investors.
The U.S. bond market experienced a tumultuous week, with key yields hitting multi-month highs before retreating, sparking debate among traders about potential buying opportunities.
The benchmark 10-year Treasury note yield last week surged to 4.818%, a level not seen since November 2023. This climb was initially fueled by concerns over the escalating U.S.-Iran conflict and its potential impact on inflation. However, the yield saw a pullback following remarks from a Federal Reserve official suggesting a pause in interest rate hikes. Despite this, a hotter-than-expected jobs report on Friday pushed the 10-year yield higher once again.
The rising yields have cast a shadow over equity markets. The S&P 500 remained largely flat over the past week as yields climbed, and has seen a slight decline over the last month, mirroring the approximately 16 basis point increase in the 10-year Treasury yield during the same period.
Despite the volatility, some strategists view this environment as creating attractive entry points. Oliver Shale, U.S. investment specialist at Ruffer, told CNBC that he is increasingly interested in medium-term debt, such as the 10-year Treasury. Shale believes we are entering a new economic regime characterized by more volatile inflation dynamics, with long-term yields expected to rise.
"We are actually becoming increasingly interested or convinced that duration has a role to play at protecting a portfolio, particularly in a growth slowdown," Shale stated. He suggests increasing exposure to debt instruments like the 10-year Treasury, noting that as yields rise, bond prices fall, making them cheaper to acquire.
For investors looking to gain exposure, U.S. 10-year notes can be purchased directly through TreasuryDirect. Alternatively, exchange-traded funds (ETFs) like the iShares 7-10 Year Treasury Bond ETF (IEF), which holds over $42 billion in assets and has a 0.15% fee, offer a way to invest.
Gregory Faranello of AmeriVet Securities sees an even greater opportunity if the 10-year yield breaches the 5% mark or if the Federal Reserve decides to raise rates later this month. The 10-year rate last reached this significant 5% level in October 2023.
Traders are currently pricing in a 58% probability of a quarter-point rate hike by the Fed 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, commented.
However, Faranello advises a cautious, phased approach rather than an immediate, large-scale investment in bonds. "We've been advising our clients to not necessarily go in, but [to] scale in here in terms of duration," he explained.
He also highlighted uncertainties surrounding the bond market, particularly concerning central bank purchasing habits. Japan, a significant buyer of U.S. Treasurys, has reportedly slowed its accumulation, leading to minimal growth in its holdings between 2011 and 2024. This has raised questions about who will absorb the increasing supply of U.S. debt.
Despite these concerns, Faranello believes domestic money managers and investors will see further yield increases as an opportunity. He noted that while the total U.S. federal debt surpassed $40 trillion this summer, domestic buyers are expected to step in.
For those looking to capitalize on rising yields, HSBC has identified several stocks with a positive correlation to the 10-year Treasury yield. These include Apollo Global (32% correlation), Chevron (26%), Alphabet (21%), and Wells Fargo (11%).
