Bond investors should worry less about Treasury yields, and watch this move instead

By Christine Idzelis

Tensions between the U.S. and its NATO allies over Greenland put some investors on edge

The 10-year Treasury rate was hovering just above its 200-day average on Thursday, according to FactSet data. It's up about 10 basis points in January.

This week's jump in Treasury yields put investors on alert for ripple effects that could include higher borrowing costs for the U.S. government, companies and consumers.

That matters because President Donald Trump has been making an affordability push in his second term in the White House before this fall's midterm elections.

Yet confidence in the U.S. economy is keeping the calm in the $30 trillion U.S. Treasury market, despite worries earlier this week over Trump's threats of tariffs on European countries in the North Atlantic Treaty Organization and his effort to buy Greenland.

Those worries seemed to only briefly be reflected in the closely watched 10-year Treasury yield BX:TMUBMUSD10Y, as it jumped above its 200-day moving average on Tuesday. That can signal that upward pressure on rates may be in the cards. Yet the 10-year yield was hovering only slightly above that level Thursday, trading around 4.25%, after reversing most of its big move higher on Tuesday, according to FactSet data.

Volatility in the U.S. bond market has been pretty tame for months. It spiked this week, but receded after Trump on Wednesday walked back his threat of new tariffs on European countries that were signaling resistance to his efforts to exert control over Greenland. Trump said Wednesday he would not use force to take over Greenland, and in a social-media post he later said a "framework of a future deal" involving the Danish territory had been reached as part of a plan for the U.S. to secure its national-security interests.

For all the attention paid to the level of long-term rates, it's the speed of moves in the bond market and the resulting volatility that can make investors nervous.

Despite sharp climbs in rates earlier this week, the U.S. bond market doesn't appear anxious about the future of Greenland and NATO, according to Phil Camporeale, a portfolio manager for J.P. Morgan Asset Management's global allocation.

"The volatility of rates is more important to us than the actual rate itself," Camporeale said in a phone interview. Volatility in the bond market, as measured by the ICE BofAML MOVE index, has dropped to levels last seen in 2021 - signaling bonds are generally capable of playing a protective role in portfolios, even if there are some knee-jerk swings along the way, he said.

Camporeale isn't sweating the 10-year Treasury rate at its current level, saying that geopolitical fears in the bond market seem to be short-lived and that fundamentals tied to the U.S. economy were more important drivers. "There is nothing controversial about a 10-year note" trading between 4% and 4.5%, he said. "We don't expect rates to fall in a world where we're as comfortable or confident that we've been in the U.S. economy for a long time."

The MOVE index reflected relative calm in the bond market, dropping more than 10% on Wednesday to 59.56, trading below both its 50-day and 200-day moving averages, according to FactSet data.

FACTSET

Although investors are monitoring NATO tensions over Greenland, Camporeale said that in his view, market anxiety on Tuesday was probably driven more by concern that the jump in yields on Japanese government bonds risked having a spillover effect on European and U.S. sovereign debt. Ultimately, in the U.S., what drives long-term rates is inflation expectations, he said. Camporeale expects that core inflation in the U.S. will end 2026 around 2.8% - still above the Federal Reserve's 2% target - but for real gross domestic product to expand above trend at 2.3%.

Still, 30-year fixed rate mortgages were pegged at 6.19% on Thursday, according to Mortgage News Daily, up from a brief dip below 6% earlier this month.

One popular way for investors to get exposure to U.S. bonds is via exchange-traded funds. The Vanguard Total Bond Market ETF BND - a giant fund that broadly tracks the U.S. investment-grade market including Treasurys - saw its biggest daily inflow on Tuesday since September 2024, according to FactSet data.

The fund, the largest U.S. bond ETF with nearly $150 billion of assets under management, attracted $868 million on Tuesday followed by a much smaller inflow Wednesday, FactSet data shows.

"Bonds in the portfolio today provide both a return opportunity as well as protection," said Camporeale. Last year, many people were saying to own cash instead of bonds, but "cash totally underperformed."

Michael Kelly, global head of multi-asset at PineBridge Investments told MarketWatch that the bond market was once a "wonderful diversifier" but now is a "modestly positive diversifier" due to fiscal deficit concerns globally. Kelly said the 10-year Treasury note was trading around the low end of the range he expects to see this year of 4.25% to 4.75%.

With bond yields and prices moving in opposite directions, he currently favors "the belly," or the three- to five-year portion, of the yield curve in the U.S. as it should benefit if the Fed continues to cut rates this year.

"Cash is going down in yield, probably in the back half of the year," Kelly said. "You'll be victimized a little bit by that if you're in cash," he added, but "you'll be benefited a little bit by that if you're in the belly of the curve."

-Christine Idzelis

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01-22-26 1822ET