Is Now A Good Time To Invest In Bonds?

Where Do Bond Yields Stand?

Long-term US Treasury yields have risen in recent months amid concerns that higher energy costs could fuel inflation. On May 19, the yield on the 30-year US Treasury closed at 5.182 percent, its highest level since 2007.

Real yields, which adjust for inflation, have also increased. The 10-year TIPS, or Treasury Inflation Protected Securities, yield stands at 2.10 percent, well above its 20-year average of 0.807 percent.

In addition to higher nominal and real yields, inflation concerns and market-based inflation expectations have increased. Rising inflation is unfavorable for fixed cash flow investments such as bonds because it reduces the purchasing power of future cash flows.

How To Assess Whether Bonds Are Attractive Today

#1: Breakeven Yield, Or Yield Cushion

One way to determine if bonds are an attractive investment is to calculate their yield cushion. Yield cushion estimates how much yields would have to increase (or how much prices would have to drop) before the total return over a certain period falls below zero. That is accomplished using breakeven analysis based on the duration and yield to worst of a bond or bond index.

Duration estimates the change in price of a bond given a one-percent change in underlying interest rates. Using duration, one can calculate the total return of a bond. That equation is duration (the price change) plus yield (the income). From this, we can estimate how much yields would need to rise for negative price returns to fully offset income over a given time period.

To apply the above, breakeven analysis estimates the total return of the Bloomberg Aggregate Bond Index would turn negative if interest rates increased by 0.81 percent and the Bloomberg Municipal Bond Index would turn negative if interest rates increased by 0.56 percent over the next year.

As always, it’s important to first consider the investor’s tax rate to determine if a taxable or tax-exempt investment is appropriate because taxes reduce the net returns.

In looking at the breakeven yields over time, both the investment-grade taxable and municipal bond markets are well above their 20-year averages. As an active fixed income manager with more than 30 years of experience, I think this historically high yield cushion makes these bond markets attractive.

#2: Inflation Expectations Comparison

To determine if bonds are an attractive investment relative to inflation, it’s important to understand what the markets are pricing in for future inflation.

In looking at the current inflation expectations, the TIPS market is pricing in a 5-year future inflation rate of 2.5 percent, which means the market is expecting an average annualized 2.5 percent increase over the next five years. The current 2-year inflation expectation is 2.58 percent and the 30-year expectation is 2.39 percent as of May 26. If actual inflation comes in lower than these expectations, it is likely that bond prices will rally.

The below chart shows 10-year inflation expectations and the 10-year Treasury yield. Unsurprisingly, when inflation expectations decline, bond yields decline and prices go up—and vice versa.

Since the Iran war began in late February, the bond market has steadily increased its inflation expectations across various time horizons. In recent days, however, there has been a decline in expectations as rumors of a peace deal with Iran circulate and oil prices decline.

Are Rising US Debt Levels A Concern?

Increasing US debt levels are a concern for many reasons, but for bond investors, it boils down to supply versus demand.

According to the Federal Reserve Bank of St. Louis, the federal debt was $38.5 trillion as of Q4 2025, up from $23.2 trillion in Q4 2019. The Congressional Budget Office estimates that by 2056, the national debt will rise to $168 trillion. In the eyes of bond investors, the risk is that there will simply not be enough buyers of US Treasury debt and, as a result, bond prices will fall, interest rates will rise, and inflation will rise.

Despite increasing US debt, foreign holdings for US debt have also been increasing. That is because the US Treasury market is the largest, deepest, most liquid securities market. The Securities Industry and Financial Markets Association (SIFMA) values outstanding US Treasuries at more than $30 trillion with an average trading volume of over $1.23 trillion.

Given the size and breadth of the US Treasury market, it is unlikely in the near term that this market will be dethroned. No other bond market comes close—it is the basis for most derivatives, options, futures, and other securities. As a result, it is unlikely that demand for US Treasuries will decrease any time soon.

The Bottom Line: Bond Market Is Attractive Today

Using the above calculations, the consensus is that bonds are attractive because yield cushion against adverse price movements are high and inflation expectations should decline, causing bond prices to rally.

Despite the near-term concerns around inflation and inflation expectations—and the long-term concerns about increasing debt level—bonds offer high-quality, attractive yields with less volatility than other securities.

Given the exceptional yields available today, I believe that investors should take a hard look at this asset class as part of their investment strategy.

• Municipal bonds are very attractive for those in the higher marginal income tax brackets. The tax-efficiency can’t be beaten.
• For those investing in IRAs, 401(k)s, 529s and other tax-deferred investment vehicles, corporate bonds would be preferred over the lower yielding US Treasury.

And finally, as an active fixed income manager, I believe that active fixed income management in ETFs, mutual funds, or separately managed accounts has its advantages and should be assessed on an investor-by-investor basis.