Bond markets have been volatile this year, and investors are watching the yield on 10-year Treasurys especially closely. In 2023, yields spiked to 5%, and they have tended to hover in a range from 4% through 4.4% this year, which at times has meant the yield on 10-year Treasurys has been higher than the yield on the S&P 500.
Bond traders and market analysts suggest the volatility is far from over. Markets are still pricing in one more Federal Reserve interest rate cut before year-end, but with the change in presidential administration on the horizon, it is hard to say what is on deck for 2025. Many of President-elect Donald Trump’s policies could have an inflationary impact, which could mean the Fed opts to leave rates where they are in order to maintain inflation in the target range of 2% to 4%.
“Right after the election, we saw an 18-basis-point pop in the 10-year, which was significant,” says Karin Anderson, director of credit manager research at WTW. “I don’t think we’re going to keep seeing big spikes like that, but everyone is focused on inflation right now. There are a lot of question marks about policies, and I do think we’re going to see higher volatility at the long end of the curve through the end of the year and into 2025.”
For institutional investors, the end of the year might be a good time to assess current exposure. Assets are flowing into fixed income, broadly—and Treasurys, specifically—at a pretty solid pace, Anderson says, adding that ongoing volatility may offer investors some tactical opportunities. If equities continue to rise, sources say, investors may opt to take profits and move more money into bonds to take advantage of higher yields.
Fiscal Fog
Yields could stay higher through the end of the year as markets react to appointments by Trump’s administration, as well as other macroeconomic data.
“The fact that we’re potentially looking at a unified government, I think, is pushing the curve higher,” says Simon Dangoor, head of fixed-income strategies for Goldman Sachs Asset Management. “Some of the policies could, if enacted, lead to higher bond issuance, which I think is driving some of it. We’re also seeing generally higher demand for the long end of the bond market as flows come from the equities market into fixed income—particularly in the pension funds sector, where we are seeing some rebalancing take place. Those trends are likely to continue as the market continues to parse out where we are.”
Joanne Bianco, a partner in and investment strategist at BondBloxx, agrees and anticipates that there could be opportunities along the curve, depending on how comfortable investors feel adding longer-duration bonds.
“We’ve seen a lot of activity at the short end over the past few years because yields have been highest there,” Bianco says. “But we’re talking to people about looking at longer-dated bonds in this environment. If you’re not ready to go to 10, there are still opportunities looking two years out, for example. It can help with diversification as well.”
Bond Vigilantes Issue a Warning
Analysts anticipate that the yield on the 10-year is likely to stay within the 4% to 4.4% range in which it has been trading all year. Any big moves are likely to be on the heels of significant changes in fiscal policy. While some of that can happen quickly, most of it is likely to be a story for the second half of 2025 and beyond.
“It’s still a bit early to tell what is real and what isn’t,” Dangoor says. “If some of the tariff proposals turn out to just be a negotiating tactic, then we aren’t likely to see some of the most extreme negative impacts people are talking about, for example. The bigger picture is that the Fed is pretty fairly priced here—at least right now. So there’s an opportunity for investors to rebalance, and they could do that across the term structure.”
Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, says he is talking to clients more about term premia, which could be supportive to portfolios over the next few quarters.
“We haven’t been talking about term premia for a while because it wasn’t really a feature of the bond market for several years,” McIntyre says. “But it’s back now, and if investors are taking on duration, they should look closely at their exposures to make sure that they are going to get paid for the risk.”
Looking ahead, McIntyre says bond market participants are going to be watching fiscal and monetary policy closely and could act to slow down any moves by an incoming Trump administration if they damage the U.S. economy.
“Is it going to be a 2017 2.0, where he ran through a lot of stuff? Or is Congress going to be more thoughtful this time around? I think a lot of people will be watching closely,” McIntyre says. “Bond markets have very recently lived through an inflationary cycle, so the world is different from what it was in 2016-17. If they aren’t focused on debt and deficits, [and] if they do a bunch of spending, you could see some pushback. Trump gets it—all politicians are beholden to the bond market.”
Tags: BondBloxx, Bonds, Brandywine Global Investment Management, fixed-income securities, Goldman Sachs Asset Management, Jack McIntyre, Joanne Bianco, Karin Anderson, Simon Dangoor, WTW