Recent weeks have witnessed significant turbulence within the bond market, characterized by a substantial ascent in Treasury yields. Both 10-year and 30-year Treasury rates have surged to levels not seen in two decades, a trend mirrored across other sovereign debt markets globally. This surge coincides with persistent elevated inflation, prompting the Federal Reserve to implement a 25-basis-point increase in the federal funds rate at its latest meeting. Market expectations further anticipate at least one additional rate hike by the end of 2026 and potentially a few more in 2027, signaling a prolonged period of higher interest rates.
While this environment presents challenges for borrowers, notably homebuyers facing average 30-year mortgage rates nearing 7.5%, it simultaneously unlocks compelling opportunities for fixed-income investors. The prevailing higher yields mean that investors can now achieve attractive returns that outpace inflation without assuming excessive credit or duration risk. Compared to the low-rate environment preceding the global inflation spike, elevated yields offer a more robust income generation stream and a greater cushion against price volatility. This shift in market dynamics is prompting a re-evaluation of fixed-income strategies among wealth management firms.
A Measured Shift Towards Enhanced Yields
Chief investment officers (CIOs) across a spectrum of wealth management firms are identifying promising opportunities across various segments of the fixed-income market. This includes traditional U.S. Treasuries, municipal bonds, high-yield corporate bonds, private credit, and Treasury Inflation-Protected Securities (TIPS). Many are also expressing a bullish sentiment towards active management within their fixed-income allocations as a means to generate alpha, or outperformance relative to benchmarks.
Jeff Neumeyer, principal partner and chief investment officer at Open Arc Corporate Advisory, a firm managing over $10.5 billion in assets, articulated a strategy of prudent positioning. "We have tilted toward quality, trimmed exposure where spreads don’t justify the risk, and kept some dry powder to add if the setup improves," Neumeyer stated. This approach reflects a careful calibration of risk and reward in a dynamic market.
Matthew Liebman, founding partner and CEO of Amplius Wealth Advisors, with $1.7 billion in assets under management (AUM), described their approach as a "measured shift rather than a dramatic repositioning." He elaborated, "We’ve been underweight duration in most client portfolios for several years, and we’re now gradually moving closer to a neutral duration stance as we assess where rates settle. It’s a measured shift rather than a dramatic repositioning. We are not chasing the move, but we no longer see the same asymmetric case for staying as short." This sentiment underscores a gradual adjustment rather than an abrupt pivot, emphasizing a strategic response to evolving market conditions.
The implementation of these strategies varies among wealth firms. While a minority opt for direct debt purchases, the majority employ a diversified approach, utilizing a blend of Exchange Traded Funds (ETFs) and mutual funds, often within Separately Managed Accounts (SMAs) tailored for individual clients. Some firms also incorporate structured notes and private credit for clients with a higher tolerance for illiquid positions.
Chris Osmond, CIO for Fifth Third Wealth Advisors, managing approximately $8 billion in AUM, indicated a primary reliance on individual bond issues, complemented by actively managed mutual funds and ETFs. "The core fixed income allocation generally includes high-quality short-to-intermediate-duration bonds and flexible multi-sector strategies that can allocate among corporate credit, securitized assets, loans and other income-oriented sectors," Osmond explained. This diversified approach aims to capture opportunities across different segments of the fixed-income landscape.
Limited Incentive for Long-Duration Bets
In the realm of government debt, allocators are predominantly focusing on the shorter end of the yield curve. This strategy is largely driven by the minimal spread observed between two-year and 10-year Treasury yields, which diminishes the allure of longer-dated maturities. Most market participants see little compelling reason to invest in long-dated Treasuries when short-dated debt offers attractive yields, although this outlook could shift with evolving economic conditions.
Cyrus Amini, CIO at Hyphen Wealth Management, managing $125 million in AUM, expressed a cautious view on long-duration Treasuries. "I think looking for opportunities on the long end is a low-success strategy right now given the overall level of leverage in the market," Amini commented. "Global yields are converging on an upward path, with massively more supply versus history. I continue to focus on the short end of the curve and floating rate debt." This perspective highlights concerns about market leverage and the persistent upward trend in global yields.
The landscape for municipal bonds presents a more nuanced picture, with attractive yields typically found in the 10- to 15-year maturity range. Christopher Gunster, partner and head of fixed income at Fidelis Capital, managing about $2.3 billion in AUM, highlighted the compelling tax-equivalent yields available. "If you look at the high-grade yields, especially at the index level, you’re looking at 6% on a tax-free basis," Gunster stated. "If you look at the tax-equivalent yield, it’s close to 10%. You’re not going to find that in any other liquid type of investment. So, we look at that as an attractive place." The tax advantages of municipal bonds, especially in higher tax brackets, make them a significant consideration for income-focused investors.
Beyond government and municipal debt, CIOs are identifying opportunities in agency-backed mortgage-backed securities (MBS), asset-backed securities (ABS), non-agency residential mortgage-backed securities (RMBS), infrastructure debt, and floating-rate high-yield debt. Lawrence Gillum, chief fixed income strategist for LPL Financial, noted, "We currently think core markets—investment grade corporates and agency MBS—and securitized markets—asset-backed securities, RMBS, and select CMBS—are most attractive, but we also think non-U.S. developed and emerging market debt are attractive opportunities for both income and diversification." This broad outlook suggests a strategic diversification across various fixed-income sectors to capture income and mitigate risk.
Regarding credit risk, several allocators have observed an improvement in credit quality across the board, including within the high-yield corporate debt sector. Brian Spinelli, co-CIO at Halbert Hargrove, managing around $4.2 billion in AUM, elaborated on this trend: "Our approach has been to find asset managers…that have a long track record of credit research and the ability to manage that. When you look at the U.S. high-yield index, underlying credit quality has improved over a decade ago. A lot of that index—more than 60%—is now BB-rated. That’s partly the reason that spreads are rather tight there versus historical standards. … You don’t see Cs and junk dominating that index at this point." This suggests that while high-yield bonds may appear riskier, the underlying creditworthiness of issuers has strengthened, leading to tighter credit spreads than historical norms might imply.
Areas of Persistent Concern
Despite the emerging opportunities, certain areas warrant continued vigilance. Companies facing significant debt maturities in a lower-yield environment, now requiring refinancing at substantially higher rates, present a potential point of vulnerability. Furthermore, the substantial debt accumulated by AI hyperscalers to fuel their capital expenditure plans is a growing concern.
Neumeyer of Open Arc Corporate Advisory pointed to the capital expenditure trends of these technology giants: "The consensus has their capex outpacing operating cash flow into next year, and they are leaning heavily on bond markets to fund it. The market is absorbing it fine for now, but the cushion gets thinner if growth slows." This highlights the delicate balance between continued growth and the increasing reliance on debt financing.
Gary Pzegeo, managing director & CIO at CIBC Private Wealth, which manages approximately $121 billion in assets, detailed their approach to risk assessment. Their internal strategic and asset allocation committee constructs default expectations based on macroeconomic variables, weighing market-priced credit risk against these projections. Pzegeo noted, "For now, there are good tailwinds and high potential growth in the U.S. You still have significant buyers out there [for Treasuries]. There’s no market that is as liquid as the U.S. But we have also been saying it’s worthwhile to do some currency diversification and get clients exposure to other parts of the world and other currencies if there is a breakdown in the U.S. deficit outlook." This dual focus on domestic strength and international diversification reflects a comprehensive risk management strategy.
CIOs continue to express optimism regarding private credit, viewing some market concerns as overblown and largely confined to the middle-market corporate direct lending sector. Spikes in redemptions that have impacted some semi-liquid private credit funds are seen as temporary disruptions rather than systemic issues.
Regarding Federal Reserve policy, wealth CIOs largely align with market consensus forecasts, which anticipate two to three additional rate hikes through early 2027. Beyond this horizon, the outlook becomes less certain, though significant further rate increases are not widely expected. The trajectory will likely hinge on whether inflation, particularly driven by energy prices, moderates. Conversely, there is no indication of an imminent reversal in Fed policy towards aggressive rate cuts, given that long-term inflation expectations remain anchored around 3.0%.
For investors seeking inflation protection, Treasury Inflation-Protected Securities (TIPS) are garnering attention, currently offering real yields exceeding 2.5%. Additionally, some allocators are exploring real assets and alternative investments as avenues for income diversification and inflation hedging. The prevailing sentiment is to construct a portfolio that incorporates multiple inflation hedges rather than relying solely on TIPS.
Warren Hurt, senior vice president and CIO at F&M Trust, managing about $1.4 billion in assets, articulated a preference for broader inflation protection strategies. "We generally look to get our inflation protection from equities and hard assets like gold (via ETFs) and real estate," Hurt explained. "We have found the accounting and shadow taxation issues in TIPS make them hard to recommend. As long as the federal government creates dollars faster than the GDP creates goods and services, inflation pressures will remain. Under those conditions, an overweight to long bonds is hard to recommend." This view emphasizes the structural drivers of inflation and the limitations of specific inflation-hedging instruments.
Fifth Third’s Osmond echoed the importance of a diversified approach to inflation hedging: "The objective is not to make an all-or-nothing inflation thesis. It is to build multiple sources of protection across the portfolio while recognizing that different inflation hedges will behave differently depending on whether inflation is being driven by demand, energy, wages, supply constraints or monetary and fiscal policy." This highlights the dynamic nature of inflation and the need for a flexible hedging strategy.
The Opportunity Ahead: A New Era for Fixed Income
When engaging with clients, Halbert Hargrove’s Spinelli stresses the importance of re-evaluating fixed income through the lens of current opportunities, rather than adhering to strategies developed in a lower-rate environment. "It’s about looking forward and understanding what you have in this environment vs. what you had before inflation and rates started going up," he advised. This forward-looking perspective is crucial for aligning portfolios with the prevailing economic conditions.
Fidelis Capital’s Gunstler encourages investors to seize the current market moment: "What I tell clients and what I’m telling you and your readers is that when the market gives you an opportunity, take it. The current environment of high interest rates is something we haven’t seen in many years. I’ve been through ZIRP and trying to convince clients I could add 5 or 6 basis points. Now, I can give tangible real yields, tangible nominal yields and total returns that look very attractive." This statement underscores the significant improvement in potential returns for fixed-income investors compared to the era of zero interest rate policies.
Amplius’s Liebman noted that client conversations have been relatively smooth, despite market volatility. "Since we have stayed short duration and high quality, the rise in rates has largely been a positive for our clients’ bond portfolios rather than a source of pain," he said. "That makes it much easier to have the conversation than if we’d been caught long duration." This positive client experience stems from a proactive risk management strategy that aligned with the market’s upward rate trajectory. The current environment, while volatile, presents a compelling opportunity for investors to enhance income and achieve attractive total returns in their fixed-income allocations, a stark contrast to the challenges of the preceding low-rate era.
