Long-time bond sceptics now see value in long Treasuries above 5% yield

Oil continues to be the variable that could shift the outlook. Rising prices for diesel and petrol linked to the conflict in the Middle East directly stoke inflation expectations, and one strategist cited by Barron's described it as an unpredictable factor for US interest rates. This means any recovery in long-dated bonds depends on headlines about Gulf supply, similar to what Goldman Sachs pointed out in its recent analysis. Significant money flowing into long-duration funds during a historic losing streak indicates that institutional investors are prepared to buy into declines, which might temper the selloff even if it does not reverse it. On the other hand, a central bank that remains on a tightening path, a large volume of new debt issuance, and borrowing by companies related to AI are all putting continued pressure on yields, leaving volatility elevated.

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Long-term US government bonds are experiencing their worst period on record, and that is precisely why two of their most persistent detractors have now concluded it is time to purchase.

• As Barron's reported, two strategists who avoided developed-nation government debt for years are now advocating for long-dated US Treasuries
• The iShares 20+ Year Treasury Bond ETF, valued at roughly $47 billion, has declined for ten consecutive sessions, its worst such streak, but has still attracted approximately $5 billion in net inflows so far this year
• One strategist believes the Federal Reserve will eventually reduce rates to safeguard government finances, a perspective Barron's warns could damage perceptions of central bank independence
• The other argues that present yields—around 5.3% on the 10-year and about 5.6% on the 30-year—make the securities appealing
• Hazards include large fiscal deficits, expenses tied to conflict, inflation close to 3%, corporate borrowing for AI, and increasing energy costs

Two analysts who have kept their distance from sovereign bonds for an extended period now recommend long-maturity US government debt, even as this market segment undergoes one of its worst performances ever, according to Barron's.

One of them, a co-founder of a research firm who has cautioned against major-economy government paper since 2022, issued advice this week to buy 10- and 30-year Treasuries. Another, the founder of a US-based research shop, turned favourable toward long-duration sovereign debt last week, marking his first such call in six years.

This change in stance comes amid substantial losses. The iShares 20+ Year Treasury Bond ETF, worth around $47 billion, has dropped for ten consecutive trading days, a record stretch of declines. Despite the pain, investors anticipating a recovery have continued to add money, bringing total inflows into the fund to roughly $5 billion for the year after seeing outflows as recently as August.

The optimistic outlook runs contrary to the prevailing view that the Federal Reserve will continue raising interest rates. The consensus forecast places the fed funds rate, currently between 3.75% and 4%, climbing to a maximum of 4.75% by the end of 2027. Yet the central bank's own projections, published last month, indicated that most officials expect rates to be below 4.25% in 2027.

The first strategist contends that lower rates are inevitable partly because an expanding budget deficit will compel the Fed to protect the solvency of the government and the banking system. Barron's warned that a central bank perceived as loosening policy to accommodate government borrowing would erode trust in its independence, probably pushing bond yields higher instead of lower.

The second strategist makes a more straightforward case: yields have climbed high enough to justify owning the bonds. On Tuesday, the 10-year yield settled at approximately 5.3%, while the 30-year yield ended at about 5.6%.

The threats are still considerable. Barron's highlighted rising federal debt, the financial burden of war, inflation hovering near 3%, competition from corporate borrowing to finance AI projects, and higher fuel prices. For investors prepared to endure short-term swings, however, the publication concluded that long-dated Treasuries now appear attractive.