Is It Time to Add Treasury Bonds to Your Portfolio?

Some analysts estimate that a reasonable range for the 10-year U.S. Treasury yield would be between 4.25% and 4.5%, and if it rises to 5%, that would be the time to consider adding positions.

After two months of selling, the U.S. bond market has finally shown signs of stabilization, with investors actively entering as U.S. Treasury yields test new highs.

Since mid-September, Trump's election victory, stubbornly high inflation, and continued strong economic data have driven a significant increase in the 10-year U.S. Treasury yield. However, the market has not yet formed a clear consensus on its future trajectory.

After breaking through 4.5% on November 15th, U.S. Treasury yields quickly reversed amidst a wave of massive purchases and have not broken through that level since. The 10-year Treasury yield closed last week at 4.4% and further declined to about 4.36% in Asian trading on Monday, as traders reacted to Trump's choice for Treasury Secretary.

Fund managers at Pimco have indicated that U.S. Treasury yields above 4% are inherently attractive. However, due to the federal government's debt now also generally moving in the opposite direction to stock prices, it has also begun to play its traditional role as a hedge against stock market declines.

Erin Browne of Pimco said in an interview that U.S. Treasuries are an asset with very low volatility and high returns, adding that if the 10-year U.S. Treasury yield returns to 5%, she would very actively consider increasing holdings.

Over the past two months, the U.S. Treasury market has experienced another turbulence, which contradicts expectations that the bond market would rebound after the Federal Reserve began cutting interest rates. Instead, since the Fed's first rate cut in September, U.S. Treasury yields have continued to rise as strong economic performance and Trump's election victory have prompted traders to reassess the magnitude of rate cuts.

Trump nominated Besent, who runs the macro hedge fund Key Square Group, as the next U.S. Treasury Secretary last Friday. He is seen by some on Wall Street as a fiscal hawk and is expected to play a key role in overseeing the government's substantial debt issuance.

Besent has questioned the Biden administration's management of federal debt and criticized the Fed's significant rate cut in September. Strategists have welcomed his market experience and previous remarks on controlling spending.

Subadra Rajappa, head of U.S. interest rate strategy at Société Générale, said: I don't think investors have a strong conviction for much higher yields, but at the same time there's some resistance for a meaningful rally.

Rajappa stated that, given the uncertainty surrounding Trump's government tariffs and fiscal stimulus plans, it's more of take a pause and understand the dynamics for the market.

 Felipe Villarroel, a portfolio manager at TwentyFour Asset Management, believes that the fair value for the 10-year U.S. Treasury yield is between 4.25% and 4.5%, but he added that given that recent inflation has not worsened too much, and investors do not know whether Trump's policies will drive up prices, volatility will continue.

Although swap traders believe the probability of the Fed cutting rates at its next meeting is slightly below 50%, they expect the central bank to cut rates by a total of about 66 basis points by December 2025.

However, some strategists have said that if Trump significantly cuts taxes and raises tariffs, there is still room for the 10-year U.S. Treasury yield to rise, possibly reaching the 5% level. Bond option-related trades indicate that investors are hedging against the risk of rising U.S. Treasury yields, so the possibility of more upside has not completely disappeared.

This week, traders will gain new insights when the Fed releases its favorite inflation indicator—the PCE price index on Wednesday. Since the report's release date is the day before the market is closed for Thanksgiving, and the market will close early the next day. If the data significantly exceeds market expectations, light trading volumes could trigger substantial price fluctuations.