The 10-year Treasury yield is approaching 5%. What it means for income-seeking investors
The jump in bond yields may be spooking the market, but it is also creating some opportunities for investors seeking income. The 10-year Treasury yield topped 4.9% on Thursday, the highest level since November 2023, in the wake of the latest wholesale inflation reading and oil prices exceeding $100 . The move followed Wednesday’s yield spike, which occurred despite the Treasury Department’s announcement that it would buy back up to $6 billion of long-term debt. Bond yields move inversely to prices. “It’s a little bit of a wake-up call that the real issues of why rates are moving higher are not really being addressed,” said Luis Alvarado, co-head of global fixed-income strategy at Wells Fargo Investment Institute. “The bias is for rates to continue to move higher, because in the short term, we’ve got nominal economic growth… and we expect it to be good in the third and fourth quarter. We have an inflation problem because the war is actually not subsiding,” he added. The 5% psychological level Rates will continue to be volatile, with the 10-year possibly topping 5%, said JoAnne Bianco, senior investment strategist at BondBloxx. “The markets are definitely watching what’s going on with the price of oil and the reescalation in geopolitical tensions,” she said. “It’s gone from a higher-for-longer environment to much higher for potentially a lot longer.” Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, said a 5% yield on the 10-year is a psychological level for investors. “We think 5% would probably lure in potential buyers who haven’t necessarily decided to move out further on the curve yet,” he said. Watch duration Investors should focus on the short or intermediate part of the yield curve right now, Bianco said. Their prices are less sensitive to fluctuations in rates compared to their long-dated counterparts. This is known as duration. Ways to play that corner of the market include BBB-rated corporate bonds, high-yield bonds and emerging market debt, she added. BBBS YTD mountain BondBloxx BBB Rated 1-5 Year Corporate Bond ETF year to date Martin suggested staying below the duration of the Bloomberg U.S. Aggregate Bond Index, which means less than six years. “Yields are still near the high end of their, call it, 16- or 17-year trading range, and if there’s been investors who’ve been waiting for a sign or waiting for an opportunity to lock in attractive yields, we still think they’re there,” Martin said. That said, investors who already own longer-dated Treasurys shouldn’t sell them right now, Wells Fargo’s Alvarado said. New money should go into Treasury bills, he advised. These issues mature in 52 weeks or less. There are also attractive yields in investment grade corporates and high-yield bonds, as corporate fundamentals remain solid, he said. Alvarado also likes emerging market debt in U.S. dollars. Certified financial planner Charles Failla, founder of Sovereign Financial Group, is adding some floating rate exposure, such as bank loans and collateralized loan obligations. Consider munis Municipal bonds offer income that is exempt from federal taxes and, if the holder lives in the state in which the bond is issued, free of local taxes as well. “It’s a great generational opportunity to lock in these attractive coupons at the levels that we’re seeing right now,” Alvarado said. MUB YTD mountain iShares National Muni Bond ETF year to date For investors subject to the top marginal federal income tax rate of 37%, municipal bonds are offering tax-equivalent yields around 6.87%, said Dan Close, head of municipals at Nuveen. While munis had been doing well this year, they have underperformed over the last few weeks, he said. Right now, AA-rated issuers in the 10-year part of the curve are offering 5% coupon bonds at a discount, Close said. “That, to me, usually signals retail is interested and is starting to wade back into the market with these types of yields,” he said. “If flows continue to be positive, even if it’s just modestly positive, we should gain back some of that performance.” He particularly likes the 22-year part of the muni curve. Dividend stocks Dividend stocks typically look less appealing when Treasury yields are elevated, since investors are receiving higher compensation for a less risky asset. Jenny Harrington, CEO of Gilman Hill Asset Management, believes this time is different. For one, these stocks are trading at extremely muted valuations, since investor money has poured into growth names, she said. Further, when rates rise, stocks with a long duration — like growth names — tend to come under more pressure than dividend payers. SCHD YTD mountain Schwab U.S. Dividend Equity ETF year to date Lastly, while a 4.9% yield on the 10-year Treasury can seem more compelling than a high-yielding dividend stock, that is not really the case when you look beneath the hood, said Harrington. “Theoretically, if rates are rising, there’s likely to be inflation accompanying the higher rates,” she said. “The S & P 500’s dividends have grown at an annualized rate of 5.7% per year over the last 60-ish years … So that growth in dividends will offset the spending power destruction of inflation – where bonds cannot offer the same income growth to offset inflation.”
