The U.S. government bond market moved back into focus after the benchmark 10-year Treasury yield touched 5% on Monday, its highest level since October 2023. It later eased slightly to around 4.96%. Because bond prices and yields move in opposite directions, the rise has kept volatility elevated across fixed-income markets.
Luis Alvarado, co-head of fixed-income strategy at Wells Fargo Investment Institute, said markets are likely to keep reacting sharply to economic data, Federal Reserve decisions, oil prices and other headlines as long as yields remain high. In his view, investors should brace for continued swings.
Attention is now centered on the Federal Reserve’s next rate decision, due on Wednesday at the end of its two-day policy meeting. According to the CME FedWatch tool, markets are pricing in a 90% chance of a hike. At the same time, President Donald Trump has urged Fed Chairman Kevin Warsh to reduce the fed funds rate from its current 3.50% to 3.75%, even though Warsh signaled at Jackson Hole that rates could move higher if inflation does not show enough progress. The latest consumer price index reading showed a 3.4% year-on-year increase in August, matching Wall Street expectations but still above the Fed’s 2% target.
Chuck Failla, founder of Sovereign Financial Group, warned that holding rates steady at this stage could damage the Federal Reserve’s credibility. In his view, a loss of confidence in the central bank would prove more painful for markets than another rate increase.
Be careful with duration
JoAnne Bianco, senior investment strategist at BondBloxx, says investors should avoid the long end of the yield curve because long-dated bonds are the most sensitive to interest-rate moves. She argues that there are still multiple ways to earn income in the short- and intermediate-term parts of the curve, including BBB-rated corporate bonds, high yield bonds and emerging market debt.
Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, also recommends keeping duration below that of the Bloomberg U.S. Aggregate Bond Index, which currently means less than six years. He notes that yields are still near the top of their 16- to 17-year trading range, giving investors an opportunity to lock in attractive income. As one example, the Schwab 1-5 Year Corporate Bond ETF currently offers a 4.95% 30-day SEC yield with a 0.03% expense ratio.
Martin also believes the 5% level on the 10-year Treasury has psychological significance and could draw in additional buyers. Failla, meanwhile, is adding floating-rate exposure through instruments such as bank loans and collateralized loan obligations. He says duration risk can make sense in portfolios with investment horizons of more than 10 years only when timing is favorable, and he does not believe that is the case right now. The Janus Henderson AAA CLO ETF has a 4.63% 30-day SEC yield and a 0.20% expense ratio.
A diversified income strategy
Wells Fargo currently favors a diversified income approach across several fixed-income sectors. Alvarado says investment-grade corporate bonds remain appealing because of their yields and relatively solid credit fundamentals. In his view, short- and intermediate-term corporate bonds offer a better balance between income generation and interest-rate sensitivity.
He also highlights investment-grade municipal bonds, especially for tax-sensitive investors. Income from those securities is exempt from federal taxes and, if the investor lives in the same state where the bond was issued, may also be exempt from state or local taxes. The iShares National Muni Bond ETF has a 3.73% 30-day yield and a 0.05% expense ratio.
Alvarado also sees income potential in high-yield bonds and U.S. dollar-denominated emerging-market debt, while stressing that both segments require a selective approach.
Opportunities beyond bonds
Failla says income opportunities also exist outside fixed income. He favors real estate and infrastructure funds, particularly in private markets for accredited investors with total net worth above $1 million. For retail investors, publicly traded REITs and infrastructure funds may offer an accessible way to generate yield.
REITs and dividend stocks often come under pressure when rates rise because investment-grade bonds offer higher compensation with less risk. But Jenny Harrington, CEO of Gilman Hill Asset Management, argues that this cycle may be somewhat different. She says high-dividend stocks are trading at very subdued valuations after investor money flowed heavily into growth names.
Harrington also notes that when rates rise, long-duration assets tend to come under more pressure than dividend-paying stocks. And if higher rates are accompanied by inflation, the long-term growth in S&P 500 dividends can help offset the erosion in purchasing power. She points out that S&P 500 dividends have grown at an annualized rate of 5.7% over roughly the past 60 years, while bonds cannot provide that same income growth.
