U.S. bonds experienced significant volatility this week, with some strategists identifying potential opportunities for investors. The 10-year Treasury note yield reached 4.818% last week, marking its highest level since November 2023 amid concerns about the U.S.-Iran conflict’s impact on inflation. The benchmark rate subsequently retreated following supportive comments from a senior Federal Reserve official regarding maintaining unchanged central bank policy. However, on Friday, the 10-year yield rose again following a much stronger-than-expected jobs report. Rising yields have recently unsettled equity market investors, with the S&P 500 remaining virtually flat last week as yields climbed. Over the past month, the index has seen a slight decline, while the 10-year Treasury has advanced approximately 16 basis points. However, this upward movement in yields is making certain segments of the yield curve more attractive, according to Oliver Shale, U.S. investment specialist at Ruffer. He specifically recommends increasing exposure to medium-term debt, such as 10-year Treasuries. “We’re transitioning to a new regime, [and] to a world characterized by more volatile inflation dynamics, where the forces that suppressed inflation for decades are reversing… so, on the one hand, over the long term, yields are rising,” Shale explained. “That’s not to say bonds will always be a bad investment, and we’re actually becoming increasingly interested or convinced that duration has a role to play in protecting a portfolio, particularly during a growth slowdown.” Bond yields move inversely to prices, meaning higher yields make bonds more affordable to purchase. Investors can buy U.S. 10-year notes directly through TreasuryDirect or gain exposure through funds like the iShares 7-10 Year Treasury Bond ETF (IEF), which manages over $42 billion in assets and charges 0.15% in fees. Gregory Faranello of AmeriVet Securities believes an even greater opportunity could emerge if the 10-year yield reaches 5%, or if the Fed raises rates later this month. The 10-year rate last touched the critical 5% level in October 2023. However, traders are currently pricing in a 58% probability of a quarter-point rate increase on September 16, 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,” said Faranello, his firm’s head of U.S. rates strategy. However, investors should exercise caution and not rush to accumulate large bond positions immediately, he added. “We’ve been advising our clients not necessarily to go in, but [to] scale in here in terms of duration,” Faranello noted. He cautioned that some uncertainty exists around bonds as central banks reduce their purchases of U.S. debt. Japan, a major buyer of U.S. Treasuries, has slowed its accumulation of these assets, resulting in minimal growth in its holdings between 2011 and 2024, according to the Brookings public policy think tank. This has led some investors to question who will purchase the ever-growing amount of U.S. debt. However, Faranello suggested that domestic buyers could step up to acquire bonds, even as more are issued. “Over time, we need to find a home for this debt,” Faranello said, noting that total federal debt in the U.S. surpassed $40 trillion for the first time this summer. “But, ultimately, we think that…domestic money managers in general and investors will view any further back up in yields here as an opportunity.” Investors seeking to capitalize on rising yields also have other options. HSBC highlighted several stocks last month that show positive correlation with 10-year yields. These include private equity giant Apollo Global with a 32% correlation; Chevron at 26%; Alphabet at 21%; and Wells Fargo at 11%.

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