Recent rise in U.S. yields is recovering value in duration

Key Takeaways

• Since January, the sharp rise in U.S. Treasury yields has reinstated value in bonds beyond cash alternatives.
• While the potential remains for somewhat higher yields (i.e., lower prices), current yields in core fixed income can provide a powerful offset.

Higher income is critical to performance and creating ballast

Sticky inflation, a resilient economy, and tempered Federal Reserve (Fed) rate cut expectations have pulled 5- and 10-year U.S. Treasury yields more than 80 basis points (0.80%) higher this year. As a result, these yields have retraced roughly two-thirds of their Q4 2023 declines. Today’s higher starting yields have created an improved entry point for deploying cash and adding duration in portfolios that remain short of their benchmarks.

Over longer periods, approximately 85% of core fixed income’s total returns are driven by the income it generates. The “belly of the curve,” generally encompassing maturities between 3 and 10 years, are once again approaching levels unseen for more than 15 years. Thus, core fixed income’s total return outlook has improved markedly since December. Additionally, the higher income stream provides diversified allocations with enhanced portfolio stability in the event of increased equity volatility – a benefit that high quality fixed income lacked during the era of ultra-low rates.