Some thoughts on how I’m easing back into a bond portfolio after 14 years of interest-rate repression.

By Wolf Richter for WOLF STREET.

The 10-year Treasury yield, after one heck of a ride, closed the week at 5.28%. Eight trading days ago, the 10-year yield had blown through the 5% line after bumping into it for days, and on Thursday, it hit 5.36% intraday, bounced off and fell, and Friday morning, when the employment headlines were blurted out, it dropped to 5.15%, and it was like, here we go again, the floodgates of demand have opened, and the massive buying has started again, the way it did on October 23, 2023, when the 10-year yield hit 5% intraday briefly, but then plunged amid massive buying from tickled-to-death investors, and then they kept buying and the 10-year yield kept plunging for the rest of the year until it bottomed out at 3.79% at the end of December.

But not this time. This time, the bond investors started looking at the jobs data Friday morning and found that beyond the headlines in the media, the data was pretty decent – private-sector employers created 46,000 jobs, governments shed 17,000 jobs. And they remembered that the other issues were still hanging over the bond market: The deficit and the flood of supply of new bonds that the market will have to absorb; the debt racing to hit $41 trillion; the nasty inflation that refuses to go back into the bottle; the competition from AI bonds that are luring investors with much higher yields at much higher risks; the economy that’s running hot… It was still all hanging over the bond market.

And the 10-year yield began re-climbing Friday morning, hit 5.30% again in the afternoon, and then settled at 5.28%. During the week, it rose 11 basis points. But on Thursday and Friday, the yield spanned a trading range of 21 basis points; that was a lot of volatility in two days, and the yield ended on a high note.

Rising yields mean falling bond prices for existing holders. In price terms, there was a big rally on Thursday through Friday morning, with investors smelling the opportunity and piling in, and thereby driving down yields, but then the rally fizzled and prices fell again, and yields rose.

This bond bear market started in August 2020, following a 40-year-long bond bull market, when yields kept zigzagging down.

We’re now six years into the bond bear market, during which time the 10-year yield has risen from 0.5% to 5.28%.

Yet, long-term Treasury yields are only back in the lower end of the range that prevailed before QE had killed the bond market.

The 30-year Treasury yield closed the week at 5.63%. On Thursday, it had briefly kissed 5.69%, the highest since 2002.

Why would anyone ever do something like that?

Investors who buy 30-year bonds at the Treasury auctions take the substantial risk that the market price of the bond will plunge during its 30-year life if yields rise a lot further than at the time of purchase. Investors who bought 30-year bonds at the auctions in the summer of 2020 are now looking at a decline in market value of over 50%.

Here’s a real price: The Treasury Department, as part of its Treasury buyback auction on September 24, bought back $1.5 billion face value of a 30-year bond (CUSIP 912810TB4) that had been sold at the auction in November 2021, after yields hear nearly doubled from the low in the summer of 2020. People who bought that stuff thought they got a deal, locking in a big-fat coupon interest of 1.875% and a yield of 1.94%.

The price now: 50.6 cents on the dollar. That’s what the Treasury paid for it at the buyback auction. 30-year bonds that sold at auction in the summer of 2020 sell for less than that.

If an intrepid investor bought $1,000 face value of this bond in the secondary market on September 24, also at 50.6 cents on the dollar, they would have paid $560 for it, and when that bond matures in November 2051, they will receive the $1,000 in face value, for a capital gain of $440, and they will have collected $18.75 in coupon interest every year for 25 years, for $469. So the return on the $560 investment is $909 over 25 years.

And if something bad happens a few years from now, such as a massive recession, long-term yields will plunge, and if that something morphs into something even worse that causes the Fed to restart QE to push yields down further and re-inflate asset prices, those bonds with lots of years left to run will spike in price as yields plunge. That intrepid investor who bought that bond at 50.6 cents on the dollar might then sell it for more than face value for a big capital gain many years before maturity.

So that sounds pretty good unless there’s a lot of inflation over those 25 years, with the economy running hot. All kinds of inflation could happen over those 25 years.

Inflation eats up the purchasing power of investments. And either yield or price gains or both are supposed to make up for that loss of purchasing power, plus some.

But note, there were periods in the US when inflation spiked to 15% or more. If you buy a bond with a yield to maturity (which includes the capital gain at the end) of about 5.6%, which is what this bond bought in the secondary market at 50.6 cents on the dollar last month roughly produces, and inflation averages 2% or 3%, it’s a pretty good deal.

But if inflation averages 5% a year over those 25 years, the bond is not a good deal anymore. And it could be a lot worse. So that’s a big risk, and the probability of this occurring is something that buyers need to figure into their calculus.

To this observer, inflation will remain a major issue, and an average inflation of 2% or 3% over the next 25 years seems unlikely.

Is there “Blood in the Streets” yet?

Buy when there’s blood in the streets, is the old axiom for investors. There was Blood in the Streets of bondland in the late 1970s through the mid-1980s when the 10-year Treasury yield was over 10% and as high as 15%, and inflation was raging, and you had to have lots of cojones to buy this stuff. But that was the time to buy long-term securities. Those turned into good deals.

At a yield of 5.6%, the 30-year Treasury yield is not at the blood-in-the-street level, nor is the 10-year yield at 5.3% They’re just sort of normal yields after 14 years of interest rate repression, and they’re somewhat low given where inflation is.

But for me wanting to ease back into a bond portfolio, there is a lot to think about – after not holding bonds for a long time as 14 years of interest rate repression turned that generation of bonds into toxic un-investable waste. And I’m going to share some of those thought here.

This is obviously the furthest thing from financial advice ever. I’m just sharing some of my own strategies and thoughts concerning my own portfolio.

“Good enough to nibble” for this observer?

As I mentioned a few times in the comments last year, I started nibbling on TIPS in the second half of 2025 and in early 2026. That was too early.

I will likely nibble at the 10-year Treasury auction this coming week. And that will also be too early, as I expect yields to rise further.

I’m kicking some tires in the secondary market to look for deals in the 20-year range, such as a 30-year bond issued 10 years ago, or a 30-year TIPS issued 10 years ago, roughly. And those buys, if they materialize, will also be too early, as I expect yields to rise further.

I’m not ready to nibble on a 30-year bond at the auction. That’s just too risky. I’m not even sniffing on it. 5.6% might sound tempting, but it’s not very tempting to me because I fear inflation will be worse over the next 30 years than the bond market expects.

But the 30-year TIPS auction in February might be worth sniffing on if the TIPS yields move higher.

I’m sniffing on maturities in the 3-7-year range, which would be a bet that longer-term yields will be higher in 3-7 years than now, and I could replace those maturing securities with longer-term securities at a higher yield than now. If I nibble on them, it will also be too early as I expect yields in that range of maturities to rise further.

“Too early” means that the market values of these securities will fall below the purchase price for a period of time, as yields rise above the yield at which I bought the stuff. But I intend to hold to maturity, so market value is not an issue.

The issue is whether yields are “good enough to nibble.”

And to this observer, some of the yields are good enough to nibble – but not good enough to do more than nibbling. They’re just mildly appealing. They’re far from the Blood-in-the Streets moment where you’d want to back up the truck and load up.

And they come with very unappetizing risks, as mentioned above.

Because every buy will be “too early” unless proven otherwise, I will just nibble here and there over the years. There is no hurry. There will be better buys in the future, in my opinion.

But it’s not really possible, except with a massive amount of luck, to pinpoint in advance that one day when yields peak and then during that one day build a bond portfolio from ground up. So to nibble here and there over the years gets that process going.

I’m funding these buys by cashing in T-bills and money market funds. “T-bill and chill” was designed 1. to get through the years of long-term yields being insufficient to compensate me for the risks; and 2. to have some cash available when there is “blood in the streets.” T-bill and chill was never a forever-investment strategy.

Corporate bonds are off the table for now, because the spreads to Treasuries are still to narrow to compensate me for the credit risk they pose. But once corporate bond spreads widen enough, I might be sniffing on them too – investment grade only.

Junk bonds have a substantial amount of credit risk (the risk of default where unsecured bonds tend to get wiped out) and tend to have Blood-in-the-Street moments more often. I consider them in the same risk category as stocks. And there’s a time to do that, but that’s not on my horizon.

What’s on my horizon is very slowly easing my bond portfolio back to life after 14 years of interest-rate repression had turned that generation of bonds into toxic waste.

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