The bond market has been making headlines. The 30-year Treasury yield recently touched 5.19%, its highest level since the summer of 2007. The 10-year climbed above 4.60% on its way to 4.69%, the highest reading since January 2025. The speed of the move has unsettled some investors and raised a reasonable question: what is going on, and should I be worried?
The concern is understandable. Rising yields affect portfolios and the broader economy in ways that touch investors directly. When yields rise, the prices of existing bonds fall, so portfolios that include bond holdings can show paper losses on their statements. Higher yields also push up borrowing costs across the economy. Mortgages, auto loans, business credit lines, and the federal government's own interest expense, which can slow growth and weigh on corporate earnings. Rapid moves in rates tend to be associated with broader market stress. Memories of 2022, when bonds and stocks fell together, are still fresh.
In our view, the recent move is unsettling, but it isn't alarming. It largely reflects a mix of pressures, and the resulting yield levels are arguably among the more compelling we've seen in this cycle. Below, we walk through what's behind the move, why this period is different from 2022, and how we're thinking about bonds in client portfolios today.
Three forces are doing most of the work. It helps to walk through how each one translates into higher yields, because the mechanics aren't always obvious.
The conflict in the Middle East and the ongoing disruption around the Strait of Hormuz have pushed Brent crude into the $100s. Energy is an input into almost everything we consume (transportation, food, manufacturing, packaging,) so when oil prices rise, the cost of producing and delivering most goods rises with them.
Why does that move bond yields? When you buy a 10-year Treasury, you're locking in a fixed interest payment for the next decade. If inflation runs higher over those ten years, the dollars you receive will buy less than you expected. To compensate for that risk, bond investors demand a higher yield up front whenever expected inflation rises. So as oil prices climb and inflation expectations follow, yields move higher.
April's Producer Price Index came in hotter than forecast, private payrolls have re-accelerated to a pace consistent with roughly 169,000 new jobs per month, and same-store retail sales are running near their strongest pace since late 2022. The Cleveland Fed's inflation tracker is currently pointing to a May headline CPI reading above 4%.
Strong data pushes yields up through a different channel. When the economy is running hot, the Federal Reserve is less likely to cut interest rates, and may even need to raise them, to keep inflation from getting away. Bond yields reflect what investors expect the Fed to do, so a stronger economy generally means higher yields. A resilient economy also means investors don't feel the need to crowd into the perceived safety of Treasuries, which removes a source of buying pressure.
Real yields, the yield investors receive after inflation, have also drifted higher. This is less about inflation and more about supply and fiscal concerns.
The federal government funds its deficit by issuing Treasury bonds. The larger and more persistent the deficit, the more bonds the Treasury Department needs to sell. If the supply of new bonds outpaces demand, prices fall. Because bond prices and yields move in opposite directions, yields rise. On top of that, investors holding long-dated Treasuries naturally ask for more compensation when the long-term debt path looks uncertain. With the conflict prolonging deficit spending, that extra compensation has crept up.
This combination is uncomfortable, but it is not stagflation. The economy is growing, not contracting, and the inflation pressure is largely a supply-side energy story rather than a wage story. That distinction matters more than it might sound.
Supply-driven inflation happens when something on the production side (oil, semiconductors, shipping capacity) becomes constrained. Prices spike, but once the bottleneck clears, the pressure tends to fade. Central banks generally try to "look through" these shocks because raising rates can't fix the underlying supply issue, it can only weaken demand.
A wage-price spiral is the more dangerous inflation variant. Workers demand higher wages to keep up with rising prices, companies raise prices to cover the higher wages, workers then demand even higher wages, and so on. Once that loop takes hold, inflation gets embedded in expectations and becomes much harder to unwind. The 2021–2022 episode had elements of both, which is part of why it took the Fed so long to bring inflation back down.
Today's pressure is overwhelmingly the first kind: an energy shock layered on a resilient economy. That's an important distinction for both the Fed and for bond investors.
The instinct to look at rising yields and draw parallels to 2022 is understandable, but the starting conditions are meaningfully different.
In 2022, the Federal Reserve was forced to abandon its "transitory" view of inflation and embark on the most aggressive hiking cycle in four decades, lifting the federal funds rate from effectively zero to above 5% in roughly eighteen months. Bonds had their worst calendar year in modern history, with the broad U.S. bond index fell roughly 13%. Stocks were down sharply as well, with the S&P 500 falling close to 20% from its peak. Diversification largely failed because the rate shock hit nearly every asset class at once.
The setup today looks different in almost every important respect.
2022 vs. 2026: A Different Starting Point
Early 2022 |
Today |
|
Labor Market |
Extremely tight; multiple openings per worker | Moderating; recent data shows some re-acceleration in hiring |
Fiscal Posture |
Large active stimulus | Limited fiscal headroom |
Fed Policy Stance |
At the zero bound | Modestly restrictive (3.50%-3.75%) |
Headline CPI |
~7% and rising | ~3% with energy-driven uptick |
10-year Treasury Yield |
~1.50% | ~4.60% |
Supply Chains |
Severely Disrupted | Largely Normalized |
The most important row may be the starting yields. In 2022, bond investors faced a regime change from an unusually low starting point with very little income to cushion price losses. Today, monetary policy is already restrictive, and yields offer meaningful income before any price movement is considered.
The 10-year Treasury yield, currently around 4.60%, has traded between roughly 3.75% and 4.75% since early 2023. NDR’s fair-value model, seen below, puts the fair value for 10-year yields around 4%. In plain terms, yields today sit at the upper edge of a band that has held for nearly three years and above reasonable estimates of where they belong.
Historically, owning bonds when starting yields are at the higher end of their range has tended to produce solid returns. The elevated income provides a buffer against further price declines, and there is potential for prices to rise if yields drift back toward the middle of the range.
This is the most underappreciated point in the current environment. When yields were 1.5%, the income on a bond portfolio was so small that even a modest move higher in yields would wipe out a full year's return. Today, the income generated by bonds is large enough that the 10-year yield would need to climb well above current levels before total returns over the next year turn negative. In other words, investors are now being paid meaningfully to hold high-quality bonds.
The minutes from the April FOMC meeting, released this week, were more hawkish than markets expected. The vote to retain an easing bias was close. Three voting members dissented, preferring to remove the easing language entirely. A majority of participants discussed scenarios in which further rate hikes might be warranted if inflation remains sticky.
Markets read this as constructive for bonds. If the Federal Reserve signals it will defend its 2% inflation target, even at the cost of slower growth, then long-term inflation expectations stay anchored. Treasuries rallied modestly after the minutes were released, with the 10-year settling back below 4.60%.
The chart below plots the market’s expectation for rates over the next 12 months. Expectations as of today, three months ago, and six months ago are shown. The market is now pricing 1-2 rate hikes over the next 12 months, a drastic change from the previously expected 2-3 cuts.
The base case is constructive, but it isn't risk-free. We're focused on three things.
A sustained move in the 10-year above 5.00% would tell us the inflation story has changed character and would prompt a reassessment. A meaningful breakdown in the U.S.–Iran negotiations would prolong the energy shock and keep upward pressure on yields. And signs that elevated inflation is starting to embed itself in wage- and price-setting decisions (an early warning sign of a wage-price spiral) would be the most concerning development of all.
For now, none of those scenarios appear to be unfolding.
Within our tactical portfolios, we continue to favor an actively managed, multisector approach that provides attractive yield while maintaining moderate duration and a high level of diversification.
The strategy is leaning into areas where the manager believes they're being well compensated for the risks, including senior tranches of consumer-backed and residential mortgage securities, higher-coupon agency mortgages, and high-quality investment-grade credit. They are more selective in emerging markets and high yield, and they have built in regional diversification through rates markets like the U.K. and Australia, where central banks may have more room to cut.
The key point is that a thoughtfully managed, diversified bond strategy can generate meaningful income today across a range of outcomes, without requiring a bold call on the direction of interest rates.
Bonds remain a core part of every diversified portfolio we manage, and they will continue to be. What's notable about today is that the income they're providing is among the most compelling we've seen in this cycle. After a decade in which bonds were a low-yielding diversifier, they are once again pulling their weight on both the income side and the diversification side of a portfolio.
Headlines about yields touching multi-year highs can feel jarring. But within the context of a restrictive Fed, inflation pressure that is largely energy-driven, and yields already at the upper end of a multi-year range, the current environment is one we view as constructive rather than concerning.
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