Veteran in Bond Market Turns Bullish on U.S. Treasuries for the First Time in Six Years, Says 5.2% Yield Provides Sufficient Buffer

A yield around 5.2% has provided a substantial income buffer, even if the bond market sell-off continues, the risk-reward ratio for U.S. Treasuries has significantly improved.

Written by: Li Jia, Wall Street Insights

As the 10-year U.S. Treasury yield rises to its highest level since 2007, long-time bond bear Jim Bianco has rarely turned bullish. Jim Bianco, president and founder of Bianco Research, believes that buying U.S. Treasuries at around 5.2% yields has provided enough income buffer, even if yields continue to rise, the risk-reward ratio for bonds is improving.

On Monday, the 10-year U.S. Treasury yield rose to 5.27%, a new high since 2007. Bianco subsequently increased the duration of the actively managed bond index he oversees to over 6 years, higher than the Bloomberg U.S. Aggregate Bond Index's 5.7 years. This index is tracked by an ETF under WisdomTree. Bianco stated, "Buying bonds at a 5.2% yield has provided a substantial buffer."

Since the 10-year U.S. Treasury yield fell to a historic low of 0.3% in 2020, Bianco has been bearish on the bond market. This shift marks his first bullish outlook on U.S. Treasuries in six years. He does not believe the bond sell-off has ended but thinks that after this round of significant yield increases, the risk-return structure of bonds has changed.

Yield Breaks 5%, Bond Risk-Reward Ratio Improves

Bianco's shift is not a bet that the bond sell-off will end immediately, but rather based on the more favorable bond mathematics at current yield levels.

According to data compiled by Bloomberg, buying 10-year U.S. Treasuries at current levels means that even if yields rise further to about 6% over the next year, the price loss will roughly be offset by coupon income. Conversely, if yields fall by 1 percentage point, the returns from rising bond prices will significantly exceed the losses caused by a 1 percentage point increase in yields.

"This is a value investment opportunity. If yields continue to rise, I will keep buying," Bianco stated. He also acknowledged that the current bond market sell-off may not yet be over, so he is taking a gradual approach rather than making a large one-time bet. "I am tentatively entering the market."

Fiscal, Inflation, and Economic Resilience Push Yields Higher

Recently, U.S. Treasuries have faced continuous sell-offs due to rising energy prices, high fiscal deficits, sticky inflation, and a resilient U.S. economy, all contributing to higher long-term yields. Additionally, the financing demand driven by the AI infrastructure investment boom has further increased market attention on bond supply and interest rate levels.

Bianco believes the divergence between Federal Reserve policy and long-term U.S. Treasury yields is particularly noteworthy. Recently, even as the Fed is in a rate-cutting cycle, the 10-year U.S. Treasury yield has continued to rise, reflecting that market concerns about inflation, economic growth, and fiscal supply are overshadowing the impact of monetary policy itself.

This month, under the leadership of Chair Powell, the Fed raised interest rates for the first time since 2023, increasing the target range for the federal funds rate to 3.75% to 4.00%, and signaling the possibility of further tightening.

Bianco Has Increased Duration to Build Positions

Bianco's change in perspective is already reflected in the bond index he manages. He has increased the duration of the index tracked by the WisdomTree Bianco Total Return Fund to over 6 years, indicating a further increase in sensitivity to interest rate changes.

This ETF tracks the actively managed bond index Bianco launched in 2023. Since December 2023, the index has an annualized return of about 2.6%, slightly higher than the Bloomberg U.S. Aggregate Bond Index's 2.32%; the ETF's expense ratio is 0.6%.

From a longer-term perspective, Bianco believes that the current long-term U.S. Treasury yield of around 5% does not indicate an economic downturn but is closer to historical norms. He pointed out that since yields peaked in 1981, the average level of the 10-year U.S. Treasury yield has been about 5.3%, which is close to current levels.

"We are returning to normal," Bianco stated. "The zero interest rates from 2010 to 2020 were the absurd anomaly."

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