US 10-year yield tops 5%: 'A 40-year opportunity' or 'a bubble right now'?

As the yield on the US 10-year Treasury note surpassed 5% for the first time in 19 years, Wall Street heavyweights are offering sharply divergent investment prescriptions. While top bond managers at BlackRock and Pimco see the moment as a prime buying opportunity, hedge fund legend Ray Dalio has warned of a debt crisis and advised investors to steer clear of interest-rate-sensitive assets.

The Wall Street Journal asked six of Wall Street's leading asset managers how they are navigating the surge in yields, after the 10-year Treasury rate hit 5.241% on Monday (local time) — its highest since June 2007 — and the 30-year rate climbed to 5.561%, its highest since June 2002.

Rick Rieder, BlackRock's global chief investment officer of fixed income, who oversees more than $2 trillion in assets, said: "My funds are generating over 7% yields at a three-year duration. I've been waiting 40 years for an opportunity like this." Noting that 12-month returns following previous instances when the 10-year yield topped 5% had been strong, he said "the question is whether today is the day to enter." His answer is a cautious "yes."

Rieder said the number of investors wanting to talk about bonds — even after this year's losses — has grown "explosively," and that he has begun gradually adding long-duration bonds, which rise in price when yields fall.

Dan Ivascyn, CIO of Pimco, the world's largest bond manager, said signs of weakness are emerging in rate-sensitive sectors such as housing, but that many consumers have locked in low-rate loans and AI companies continue to invest. "We expect some slowdown, but not a recession," he said.

He said "you can build a high-quality bond portfolio yielding 6 to 7%," which he views as more attractive than overvalued equities. He also predicted that AI investment would, over the long term, boost economic efficiency, curb inflation and support bond prices.

Brian Whalen, TCW's CIO for fixed income, said more than half of US growth is coming from borrowers who are not sensitive to interest rates, and added: "The war will end and commodity prices will come down."

He pointed to bond fund flows holding steady despite this year's losses as a positive signal, and said he does not expect the rate-hiking cycle to last much longer.

Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund, took a starkly different view. He noted that the United States is spending more than $1 trillion a year on debt interest alone, and that debt-service costs have begun to "crowd out" other government spending. The author of "How Countries Go Broke," in which he warned of the dangers of surging government debt, added that the same dynamic is playing out across other Western nations.

He warned that bond supply is overwhelming demand, which will push global yields higher and ultimately slow borrowing and growth. He advised investors to diversify and avoid interest-rate-sensitive assets.

Rob Arnott, founder of Syzygy Asset Management, said the key question is when war-driven inflation will end. "Donald Trump wants us to believe the war will end soon, but there is little evidence of that," he said.

Arnott said he sees "a bubble right now," and predicted that small- and mid-cap stocks will outperform large-caps over the next few years, given the extreme valuation gap between S&P 500 companies and the next 500 by size — a gap he attributed to the AI-fueled rally in mega-cap shares.

Sonal Desai, global CIO of fixed income at Franklin Templeton, said she does not believe high interest rates will bring down the economy, but warned that government borrowing and AI infrastructure investment are competing for capital, pushing rates even higher. "The bond market is reassessing the capacity of the US economy," she said, advising investors to focus on securing stable interest income.

Desai said she is avoiding ultra-long-duration bonds, which are vulnerable to further Federal Reserve rate hikes, while considering purchases of corporate bonds issued by AI hyperscalers such as Microsoft, Meta, Amazon and Alphabet.