With Yields Above 5%, Some Investors Say It's Safe to Buy Bonds Again

“At these levels of yields your risk/reward is much better,” Hallam said. The belly of the yield curve — bonds maturing between five and 10 years — “will benefit most in the initial stages of any economic weakness.”

A favorable quirk of bond math is that higher-coupon bonds are less sensitive to price changes, a dynamic known as duration. Low-coupon bonds, by contrast, are far more sensitive to prices, and the current bond rout dates from August 2020, when the 10-year yield was a paltry 0.5%.

The benchmark yield subsequently increased ten-fold, leaving investors well educated about the adverse impact of duration.

But that risk has been reduced as long-dated coupons settle in the 5% zip code, illustrated by the risk/reward profile of the $40 billion iShares 20+ Year Treasury Bond ETF. While the exchange-traded fund, known by its ticker TLT, has slumped 50% from its 2020 peak, yields above 5% are attracting inflows.

At current levels, a long-end yield decline of 0.5% is expected to deliver a double-digit price gain for the TLT, whereas a 50-basis point rise in yields would cause a price drop of only around 1% over a 12 month period.

“If the 30 year rallies a hundred basis points, you’re making 20%,” said T. Rowe’s Bartolini. “And if the five year rallies a hundred basis points, you’re making 4%.”

Bartolini said the firm prefers owning Treasuries with a maturity of five years or less as the Fed signals it’s near the peak of its rate-hiking cycle. Even so, increased Treasury supply could still shove 10- and 30-year yields higher as the market needs “to create an incentive for those bonds to be distributed and the incentive to make that happen is higher yields,” he said.

A renewed push to higher yields beckons over the coming week, with central bank meetings on the calendar for the Fed and the Bank of Japan. Investors will also watch for the latest U.S. monthly employment report, along with a much anticipated update from the Treasury about its quarterly borrowing needs.

“The normalization of the bond market is what we are seeing right now,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.

The firm is telling financial advisers and clients to start moving their cash into bonds as the Fed wraps up its tightening cycle and inflation ebbs. “The longer rates stay at these levels the greater the refinancing pressure for consumers and small businesses.”

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