Embattled debt investors like the look of 5% Treasury yields as they weigh the risk-versus-reward scales for the world's biggest bond market.
The rise in yields to levels last seen before the financial crisis reflects a run of solid data, with the U.S. economy growing last quarter at the fastest pace since 2021.
And a rising tide of Treasury debt issuance, meanwhile, has prompted the return of a positive risk premium for owning longer-dated bonds.
For all the pain in the bond market — and some traders are betting there's more to come — the notes look a lot more attractive to long-term buyers once Treasury yields are running at 5%-or-higher.
Those levels nudge them closer to the Federal Reserve's current policy-rate ceiling of 5.5%, allowing buyers to lock in elevated income before officials eventually embark on any easing cycle.
"The arithmetic starts to move in your favor after having been out of your favor for a very long time," said Stephen Bartolini, a fixed-income portfolio manager at T. Rowe Price. "It takes a lot larger increase now to wipe out total return over a 12-month horizon because you're getting yield."
Buyers emerged Thursday, spurring a drop of some 10 basis points across the Treasury curve as another round of disappointing earnings caused equities to slide.
Investors are in need of a silver lining as they nurse wounds from the worst selloff seen for Treasurys in more than four decades.
The Bloomberg U.S. Treasury Index has dropped since a string of regional bank failures fanned expectations of a credit crunch and recession in early April. The yield on 10-year notes, meantime, has soared to above 5% this week from a 3.25% April low.
Amy Xie Patrick, head of income strategies at Pendal Group in Sydney, said she's bullish on bonds given their current yields. There's not much of a case for inflation and economic growth to re-accelerate, indicating "that the 'soft landing' is behind us," she said.
Treasury fixed-rate coupons around 5% also provide investors with the highest source of bond income since 2007, helping the debt to compete against bills and equities. They also make a portfolio more resilient in periods of enduring market pain in risk assets.
Vanguard Asset Management has been a recent buyer of five- to 10-year Treasurys, said Roger Hallam, global head of rates at the firm — with plans to "add more if yields rise further."
