Bond Yields Surge Past 5%: How Top Portfolio Managers Are Adjusting Portfolios
As 10-year US Treasury yields surge past 5% and debt hits $40 trillion, six leading CIOs from PIMCO, BlackRock, and Franklin Templeton share portfolio strategies.
The turmoil in the bond market is forcing investors to try and anticipate where the economy and their investment portfolios are heading.
The yield on 10-year US Treasury bonds recently surged to over 5%, reaching its highest level in 19 years. US debt crossed a record $40 trillion. The war with Iran is pushing oil prices upward. The Federal Reserve is expected to continue raising interest rates to curb inflation, indicating that mortgage and other loan costs are not expected to drop significantly anytime soon.
So how will the economy cope with rising interest rates, and what should investors do to prepare?
The Wall Street Journal asked six leading portfolio managers to share their insights.
Dan Ivascyn | Chief Investment Officer, PIMCO
The spike in bond yields will weigh on the economy, and signs of weakness are already apparent in interest-rate-sensitive sectors like the housing market, says Dan Ivascyn, group chief investment officer at PIMCO, which specializes in fixed income and manages $2.3 trillion in assets.
However, he notes that many consumers locked in low mortgage rates in recent years, insulating them from higher rates. Meanwhile, the artificial intelligence companies driving the US economy are expected to keep spending, providing another reason to expect continued growth.
"We expect a slowdown," Ivascyn says. "But not a recession."
He warns that if oil prices continue to rise, the bond market could take another hit. Over the long term, however, investments in AI could streamline the economy, curb inflation, and ultimately support bond prices.
For now, he says, investors should take advantage of higher yields.
"You can build a high-quality portfolio yielding 6% or 7%," Ivascyn says, calling it an attractive alternative to a richly valued stock market.
Sonal Desai | Chief Investment Officer of Fixed Income, Franklin Templeton
Investors are worried about rising interest rates and climbing bond yields. Sonal Desai remains optimistic.
Corporate earnings, stock markets, and economic growth have all shown resilience, says Desai, who oversees more than $300 billion in fixed-income assets at Franklin Templeton.
"I think we are seeing a repricing in the bond market of the capabilities of the US economy," Desai says. "I don't believe high interest rates are going to break the economy. I think we can handle it."
Desai expects yields to continue rising, putting pressure on bond prices as record government debt issuance and AI infrastructure buildouts compete for funding in the debt market. She notes that investors accustomed to equity-like returns from bonds during the period of falling rates need to adjust their expectations and focus on securing steady income.
Rick Rieder | Chief Investment Officer of Global Fixed Income, BlackRock
Rick Rieder is enthusiastic about the risk-reward trade-off currently offered by bonds.
"My funds are yielding over 7% with a three-year duration. I've waited four decades for the opportunity to do something like that," said Rieder, BlackRock's CIO of global fixed income, who manages over $2 trillion in assets.
According to Rieder, investors in the current environment do not need to take massive risks to achieve attractive bond yields. He is also optimistic that long-term US government bond prices will stabilize, noting that historically, when 10-year yields crossed the 5% threshold, subsequent 12-month returns were high.
Ray Dalio | Founder, Bridgewater Associates
The scale of US borrowing shows no signs of slowing down, and according to Ray Dalio, we have reached a point where heavy debt burdens are beginning to impact the wider economy.
Dalio, founder of hedge fund Bridgewater Associates, has warned for years about the dangers of ballooning government debt, detailing the potential consequences in several books, including his latest, How Countries Go Broke.
Brian Weinstein | Chief Investment Officer of Fixed Income, TCW
Rising interest rates typically frighten investors, but this time they have little reason to fear, says Brian Weinstein, CIO of fixed income at TCW, which manages $200 billion in assets.
Higher rates will weigh on parts of the economy, but the largest debt issuers—computing giants investing in AI businesses—remain profitable and boast strong balance sheets, helping them navigate the surge in borrowing costs.
Rob Arnott | Founder, Syzygy Asset Management
Inflation stemming from war is supposed to be temporary, but according to Rob Arnott, the challenge lies in knowing when it will pass.
"That is the key question," says Arnott, founder and chairman of Syzygy Asset Management, formerly known as Research Affiliates. "Trump would have us believe this will end very soon. I hope he is right, but I don't see much evidence of it."
Arnott believes AI is a disruptive technology that will boost productivity, but he remains skeptical of mega-cap stocks that have surged on AI enthusiasm, warning that the market is showing classic bubble characteristics.
