Investors see big opportunity in ferocious 2026 bond-market rout

By Joy Wiltermuth

Bonds are looking attractive at current levels, strategists say. 'It's just math.'

The 10-year Treasury yield hit its highest level since April 2002 on Monday, as yields continue to rise

The bond-market rout of 2026 may be jolting markets, but it's also gaining a important following among savers and the risk-averse.

Wall Street has been gripped by the volatile moves in bond yields over the past few weeks. The all-important 10-year Treasury yield BX:TMUBMUSD10Y was up another 3.4 basis points on Monday to 5.35%, it highest level since April 2002, according to Dow Jones Market Data.

That's raised the costs of new mortgages, corporate borrowing and financing the $40 trillion national debt. It also has many bond portfolios sitting in a sea of red ink for 2026, with the bond market's equivalent of the S&P 500 SPX - the Bloomberg U.S. Aggregate Index's - total return having turned negative. Bond yields and prices move in the opposite direction.

Yet bond investors aren't throwing in the towel. Instead, the selloff has been met by huge inflows to fixed-income funds.

In the past five days through Oct. 1, bond exchange-traded funds and funds took in $26.4 billion, well above the prior four-week average pace of $10.2 billion, according to data released Monday from EPFR and Barclays Research.

Furthermore, aggregate weekly inflows have been in the 99th percentile versus the past six months, bringing inflows in 2026 to $520 billion, as the below chart shows.

Bond flows in 2026 are stronger than the past two years

"Although it creates near-term pain, it's also created longer-term opportunities," said Cooper Howard, director of fixed-income research and strategy at the Schwab Center for Financial Research.

Howard said Monday that he's recommending clients use a bond "ladder" strategy to seize the opportunity by buying individual bonds, mutual funds or exchange-traded funds, with a range of short to intermediate maturities.

He's suggesting investors keep slightly under the Bloomberg U.S. "Agg" index's duration of roughly six years, even though yields have pushed well above the 5% threshold; the 5-year Treasury note's BX:TMUBMUSD05Y yield was 5.09% as of Monday.

"The higher yields go, obviously, the more attractive fixed income gets," Howard said.

Beyond that, Howard also likes municipal bonds that pay interest that's exempt from taxes at the federal level. Issuance in the sector has been booming in recent years as pandemic-era stimulus burns off and more borrowing is required to pay for things like schools, bridges and infrastructure.

To be sure, the path of inflation and how high yields might go from here remain key concerns. Inflation hurts longer-dated bonds more than shorter-dated maturities, especially if the Federal Reserve needs to hike rates by more than expected.

Still, J.P. Morgan Asset Management's fourth-quarter outlook shows the power of "bond math" across different types of bonds and maturities at current yields, as well as expected returns based on where rates might go from here.

The bond math works better for investors when starting yields are higher, as they are in 2026.

Specifically, current starting yields (light blue line) offer investors better protection against an adverse move in interest rates - say if they climb by another 1 percentage point. But if yields fall by 1 percentage point, investors would be poised to reap a very strong total return.

"I always say, that's why I like being in fixed income," said Joyce Huang, senior fixed-income portfolio manager at Vanguard, in an interview Monday. "It's just math."

The current math also means bonds finally start to look compelling relative to stocks. At bond giant Vanguard, their current longer-term return forecast for equities is about 4% to 7%. "Bond yields, today, are right there," Huang said Monday.

Still, most of the bond-investor flows into the sector lately have been in the short-term to ultrashort-term part of the market, she said, adding that some investors appear to be stepping out of cash to get there, or even de-risking a bit from equities.

"One one hand, they are a little bit nervous that yields could continue to go up, because of the fear of what happened in 2022," Huang said, pointing to the historic losses in bonds and stocks that year.

However, people also realize the foundation for bonds now looks different from four years ago, she said.

A bigger worry could be what happens to the stock market COMP at record highs, if the leading artificial-intelligence plays start to sputter and trigger a painful drawdown.

A second chart from J.P. Morgan Asset Management's new fourth-quarter outlook shows the Bloomberg U.S. Agg's return versus the S&P 500 since the 1990s:

Another thing to think about is changing demographics, especially with Gen Z and millennials in a phase where they may be trying to purchase homes, said Vanguard's Huang.

"You start to see people thinking about maybe taking some risk out of the equity market and putting aside some of the money they might need sooner, for a wedding, house purchase, things like that, into bonds," she said.

For younger adults, a 5% to 20% target allocation to bonds is probably the right amount, she added, given that the majority still should probably be in equities, given their longer-term investment horizons.

Michael DeStefano contributed

-Joy Wiltermuth

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

10-05-26 1614ET