A veteran bond market analyst has turned bullish on US Treasuries for the first time in six years, saying the 5.2% yield provides a sufficient buffer.

As the 10-year U.S. Treasury yield rose to its highest level since 2007, Jim Bianco, a Wall Street veteran who has long been bearish on the bond market, has unusually turned bullish. Jim Bianco, president and founder of Bianco Research, believes that buying U.S. Treasuries at a yield level of around 5.2% already provides a sufficient yield buffer, and even if yields continue to rise, the risk-reward ratio of 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 its actively managed bond index to over six years, higher than the 5.7 years of the Bloomberg U.S. Aggregate Bond Index, which is tracked by WisdomTree's ETFs. Bianco stated, "Buying bonds at a yield level of 5.2% already provides a substantial buffer."

Bianco has been bearish on the bond market since the 10-year U.S. Treasury yield fell to a record low of 0.3% in 2020. This shift marks his first bullish stance on U.S. Treasuries in six years. He doesn't believe the bond sell-off is over, but rather that the risk-reward structure of bonds has changed after this round of significant yield increases.

Yields exceeding 5% improve bond risk-reward ratio

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

According to data compiled by Bloomberg, if you buy 10-year US Treasury bonds at current levels, even if the yield rises further to around 6% in the next year, the price loss will be largely offset by coupon income. Conversely, if the yield falls by 1 percentage point, the return from the increase in bond prices will significantly outweigh the loss caused by the 1 percentage point increase in yield.

“This is a value investing opportunity. If yields continue to rise, I will continue to buy,” Bianco said. He also acknowledged that the current bond market sell-off may not be over yet, so he is taking a gradual approach to building positions rather than making a large bet all at once. “I am tentatively entering the market.”

Fiscal policy, inflation, and economic resilience have collectively boosted yields.

The recent sell-off in US Treasuries is driven by rising energy prices, a high fiscal deficit, sticky inflation, and the resilience of the US economy, all of which are pushing up long-term yields. Meanwhile, the financing demand generated by the AI infrastructure investment boom has further increased market attention to bond supply and interest rate levels.

Bianco believes the divergence between Federal Reserve policy and long-term Treasury yields is particularly noteworthy. Over the past period, even during the Fed's rate-cutting cycle, the 10-year Treasury yield has continued to rise, reflecting that market concerns about inflation, economic growth, and fiscal supply are outweighing the impact of monetary policy itself.

This month, the Federal Reserve, under Chairman Warsh's leadership, 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 policy tightening.

Bianco has effectively built positions by increasing duration.

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

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

Looking at a longer timeframe, Bianco believes that the current long-term US Treasury yield of around 5% does not indicate an economic crisis, but rather is closer to historical norms. He points out that since yields peaked in 1981, the average 10-year US Treasury yield has been around 5.3%, close to the current level.

“We are returning to normal,” Bianco said. “The zero interest rates from 2010 to 2020 were the absurd outliers.”

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