This week, the yield on the 10-year U.S. Treasury bond briefly surged above 5%, hitting a 19-year high. Goldman Sachs estimates that its five-year rolling return has plunged to a more than century‑low, with the severity of the downturn comparable to that following World War I and World War II, as well as during the stagflation of the 1970s. Nevertheless, these elevated yields are attracting fresh capital—U.S. bond funds have posted net inflows for 71 consecutive weeks, with short-term bonds particularly in demand. In this darkest hour for U.S. Treasuries, is it a crisis—or a once-in-a-century buying opportunity?
The U.S. Treasury market is undergoing its most severe return cycle in over a century, yet persistently high yields are paradoxically prompting some investors to re-enter the market.
The yield on the 10-year U.S. Treasury bond briefly surpassed 5% this week, hitting a nine-year high. This week, newly appointed Federal Reserve Chair Jerome Powell announced the first interest-rate hike in three years to address persistent inflationary pressures that remain above the Fed's target.
Goldman Sachs' strategy team's latest calculations show that the five-year rolling yield on the 10-year U.S. Treasury has fallen to its lowest level in over a century, with real returns as dismal as those following World War I and World War II, as well as during the stagflation of the 1970s.
Despite lingering uncertainty in the bond market, capital has not yet fled across the board. According to EPFR data, U.S. bond funds have posted net inflows for 71 consecutive weeks, as attractive yields are drawing some new capital back into the fixed-income space.
The Worst in a Century: The Double Whammy of Inflation and Interest Rate Hikes
The Bloomberg Aggregate Bond Index—often regarded as the bond market's "S&P 500"—has posted a cumulative decline of 1.6% year-to-date through Wednesday's close, on a total‑return basis. The index covers U.S. Treasuries, corporate bonds, mortgage‑backed securities, and other government‑guaranteed debt, but excludes ultra‑short‑term Treasury bills.
At the beginning of the year, the index fluctuated between positive and negative territory, but since August it has been on a steady downward trend, mirroring the global rise in crude oil prices to nearly $100 per barrel. The surge in oil prices has fueled inflation expectations, directly eroding the real purchasing power of fixed-income assets and delivering a particularly pronounced blow to longer-duration bonds.
In a report released on Thursday, Goldman Sachs' Christian Mueller-Glissmann strategy team characterized the current performance of 10-year U.S. Treasury bonds as the worst in over a century, based on five-year rolling returns. The report noted that even unadjusted for inflation, nominal returns have been extremely poor; and after adjusting for inflation, real returns are "almost as bad as they were after World War I, after World War II, and in the 1970s."
George Catrambone, Head of Fixed Income for the Americas at DWS, attributes this situation to two key factors: first, "the Federal Reserve and the market have lost patience with inflation remaining above target for an extended period"; and second, the protracted Iran conflict continues to weigh on financial markets.
The 5% Threshold: A Signal of New Capital Entering the Market
The sharp surge in yields has dealt a severe blow to existing investors while simultaneously creating more attractive entry conditions for new capital.
"The higher the yield, the more attractive it becomes to invest in bonds, at least for new capital," said Brian Rehling, co-head of global fixed-income strategy at Wells Fargo & Co.'s Investment Institute.
Cullen Roche, founder and chief investment officer of Discipline Fund, shares a similar view. He notes that bond returns have been lackluster over the past five years, primarily because yields were already at low levels at the time and interest-rate risk was overly amplified. Five years ago, the yield on the 10-year U.S. Treasury stood at around 1.3%. "But as yields rise and prices fall, these assets are becoming more attractive," he said.
Roche likens the current rationale for buying long-term bonds to purchasing a discounted used car: over time, the bond's value will depreciate at an increasingly slower pace, while its fixed annual coupon payments remain unaffected by market price fluctuations.
JPMorgan Asset Management Chief Investment Officer Bob Michele previously stated that his team has begun buying long-term government bonds in the United States, Japan, and Australia, deeming current prices "extremely cheap." He noted that the coordinated policies of the European Central Bank, the Federal Reserve, and the Bank of Japan will create a supportive chain in the bond market, while Bessent's launched long-term Treasury repurchase program is also seen as a key stabilizing force, with room for further policy measures.
Capital Flows: Short-term bonds are favored, while long-term bonds remain overlooked.
Despite overall pressure on the bond market, inflows have not dried up, though structural differentiation is pronounced.
According to EPFR liquidity analyst Winston Chua, U.S. bond funds have posted net inflows for 71 consecutive weeks. During this period, short-term bond funds attracted capital equivalent to 12.2% of their assets—roughly $139.9 billion—while long-term bond funds drew only 2.9% of their assets, or about $19.3 billion.
Notably, the aforementioned capital inflows occurred against a backdrop of near‑flat performance in short-term bond funds and nearly 5% declines in the net asset values of long-term bond funds.
However, market optimism about the bond market should remain cautious. On Wednesday, the Federal Reserve projected that inflation could end the year near 3.7% and would not return to its 2% policy target until 2029.
When asked about the sell-off in Treasury bonds, Walsh attributed the pressure to multiple "hotspots" around the globe and a host of other factors, while emphasizing that the 10-year U.S. Treasury is "the world's most important asset" and "the risk-free benchmark against which nearly all assets are priced."
Roche acknowledged, "Long-term bonds still carry risks, but they have become more attractive; short-term bonds, meanwhile, are already very appealing." The uncertainty surrounding the trajectory of a potential war with Iran, along with whether inflation will ease as expected, remain the two key variables weighing on the bond market.