Wall Street piles into US Treasurys as yields hit 24-year high

Global investors are snapping up US Treasurys even as yields surge to their highest level in 24 years. Bond prices have tumbled amid the Iran war and inflation fears, but investors see the selloff as an opportunity to lock in elevated interest income. More than $73.3 billion has flowed into US Treasury funds since the third quarter of this year.

According to the Financial Times on Tuesday (local time), data from global fund-flow tracker EPFR showed a record $59.3 billion in net inflows into US Treasury funds in the third quarter of this year. An additional roughly $14 billion poured in during October, bringing the combined total to $73.3 billion.

The yield on the 10-year US Treasury note has climbed 1.06 percentage points this year to reach 5.24 percent. Last week it surged as high as 5.36 percent, its highest level in 24 years. High oil prices stemming from the Iran war and large-scale bond issuances by AI companies have added upward pressure on yields. Because bond yields and prices move in opposite directions, the rise represents a loss for existing holders but a buying opportunity for new investors.

BlackRock, the world's largest asset manager, has been buying US Treasurys across maturities, arguing that market expectations for further Federal Reserve rate hikes are excessive. Amundi, which manages 2.6 trillion euros ($2.91 trillion), is also increasing its allocation to US government bonds. Amundi Chief Investment Officer Vincent Mortier described current US Treasury yields as "very high" and said they "naturally attract new interest."

Demand was also evident at recent Treasury auctions. At a $39 billion 10-year note auction held Oct. 7, the share awarded to primary dealers fell to its lowest level since 2003. Primary dealers are financial institutions that absorb unsold Treasury supply, so a low dealer takedown signals strong demand from end investors.

Real yields — adjusted for inflation — are also adding to the appeal. Markets expect average US inflation over the next 10 years to run at roughly 2.35 percent. Subtracting that from the 10-year yield of 5.24 percent implies an expected real return of about 2.9 percent, a meaningful gain even after accounting for rising prices.

Dan Ivascyn, CIO of global bond manager Pimco, said US Treasurys look more attractive than equities trading near all-time highs. "Given the high valuations in stocks and tight credit spreads in corporate bonds, current Treasury yields are far more compelling," he said. Greg Peters, co-CIO of PGIM Fixed Income, added that a 10-year Treasury yield above 5 percent makes for good conditions to hold bonds over the medium to long term.

On Wall Street, the classic 60/40 portfolio — allocating 60 percent to equities and 40 percent to bonds — is also drawing renewed attention. According to Reuters, the strategy lost much of its appeal during the era of ultra-low interest rates, when bond income was meager, but the picture has changed as Treasury yields have climbed above 5 percent.

The 60/40 approach seeks returns through equities while using bonds to diversify risk. After the 2008 financial crisis, however, a prolonged period of near-zero rates eroded bond income, and stocks and bonds began falling in tandem, weakening the strategy's hedging effect. Analysts now argue that elevated interest income can partially offset losses from any further decline in bond prices.

Monty Gandhi, a rates strategist at SMBC Group, said current yield levels are enhancing the appeal of bond investment. "You can earn decent carry, which makes buying bonds the more rational choice right now," he said.

Caution remains, however, around very long-dated Treasurys, given the possibility of further Fed tightening — the longer the maturity, the greater the price risk from rising rates. Peters said he was uncertain about investing in 30-year Treasurys.

Vishal Khanduja, a portfolio manager at Morgan Stanley Investment Management, also said he finds Treasurys with maturities of 10 years or less attractive but has less conviction on the 20- to 30-year end of the curve. "The cushion from interest income is becoming much more certain," he said. "It is getting easier to invest at current levels rather than waiting for a peak or trough in rates."