U.S. Treasury yields have climbed to their highest levels in more than two decades, drawing attention to bonds as an investment. J.P. Morgan Asset Management said real yields have reached a roughly 25-year peak and that investors could earn returns of as much as 8% over the next 12 months.
"Yield Everywhere" — The Case for Buying Bonds
Bob Michele, global head of fixed income at J.P. Morgan Asset Management, told a press briefing in Singapore that "everyone senses there is a once-in-a-generation yield in the bond market" and that "yield is everywhere," according to Reuters on the 27th.
Michele said that combining interest income with price gains, U.S. bond investments could deliver returns of 7% to 8% over the coming 12 months.
He also suggested that the U.S. policy rate and the Treasury yield curve could both converge around 4.5%. "Typically at the end of a rate-hiking cycle the yield curve flattens, and from current levels there is plenty of room for yields to move further," he said.
His central argument rested on the level of real yields. "When Treasury yields first passed 5% a few weeks ago, the buy signal for us was that the U.S. real yield had reached 3%," Michele said. "The last time we saw these levels was 2002. That is nearly 25 years, so it is a buying opportunity."
10-Year Yield at 5.35%, With Further Hikes a Wild Card
U.S. Treasury yields have surged recently as inflation concerns combined with the Federal Reserve's tightening stance. The 10-year yield broke above 5% on the 14th of last month for the first time since October 2023, and on the 7th of this month exceeded 5.35%, its highest level since 2002.
The moves are attributed to rising inflation concerns from higher international oil prices tied to the war in Iran, as well as the Fed's quarter-percentage-point increase last month that lifted the policy rate to 3.75% to 4.0%.
The 10-year yield eased to around 4.99% on the 27th, and developed-market government bond markets that had recently sold off also showed signs of a rebound.
Markets expect the Fed to hold its benchmark rate steady at the Federal Open Market Committee meeting that concludes on the 28th.
Beyond U.S. Treasuries, Japanese and Australian government bonds, investment-grade corporate debt and emerging-market sovereign bonds were also cited as promising. "Capital expenditure cycles are continuing worldwide, so the likelihood of a recession is very low," Michele said. "Whenever credit spreads — the gap between government and corporate bond yields — widen, you should buy."
A risk remains that inflation could become unsettled again, forcing the Fed to raise its policy rate well above 4.5%.