Treasury Yields Surge Past 5%: Strategies for Income-Focused InvestorsSurging Treasury yields have shaken financial markets, yet they may also present an opportunity for income investors seeking attractive returns. The benchmark 10-year Treasury yield briefly reached 5% on Monday, its highest level since October 2023, though it has since eased to approximately 4.96%. Because bond yields and prices move in opposite directions, the ongoing fluctuations are expected to continue as yields remain elevated, according to Luis Alvarado, co-head of fixed-income strategy at Wells Fargo Investment Institute.
“We’re just going to continue to see knee-jerk reactions to economic data, the Fed, oil, anything that happens,” Alvarado said. “Brace yourself for more volatility.”
Attention is now turning to the Federal Reserve’s upcoming interest rate decision, expected at the close of its two-day policy meeting on Wednesday. The CME FedWatch tool indicates the market is pricing in roughly a 90% probability of a rate increase. President Donald Trump has publicly urged Fed Chairman Kevin Warsh to lower the fed funds rate from its current range of 3.50% to 3.75%, though the chairman signaled at the central bank’s recent Jackson Hole gathering that rates could move higher if inflation-fighting progress stalls.
The latest consumer price index reading showed a 3.4% year-over-year increase in August, in line with Wall Street estimates but still above the Fed’s 2% target.
“If rates don’t go up at this point, then the Fed loses a lot of credibility, and if you think higher rates are painful, wait until you see the kind of pain that comes with losing credibility,” said certified financial planner Chuck Failla, founder of Sovereign Financial Group.
Managing Duration Risk
With bond market volatility likely to persist, investors should avoid the long end of the yield curve, as long-dated bonds are the most sensitive to interest rate swings — a concept known as duration, said JoAnne Bianco, senior investment strategist at BondBloxx. Investors can generate income in the short- to intermediate portion of the curve through BBB-rated corporates, high-yield bonds, and emerging market debt, she noted.
“The higher yields may be here to stay,” Bianco said.
Collin Martin, head of fixed-income research and strategy at the Schwab Center for Financial Research, recommends keeping portfolio duration below that of the Bloomberg U.S. Aggregate Bond Index, which currently translates to less than six years.
“Yields are still near the high end of their, call it, 16- or 17-year trading range, and if there have been investors waiting for a sign or an opportunity to lock in attractive yields, we still think they’re there,” he said.
Martin cited the Schwab 1-5 Year Corporate Bond ETF, which currently offers a 4.95% 30-day SEC yield with a negligible 0.03% expense ratio, as one example of an accessible vehicle. He also noted that a 5% 10-year Treasury yield could serve as a psychological threshold that draws in potential buyers who have been hesitant to extend further along the curve.
Meanwhile, Failla is incorporating floating-rate exposure through bank loans and collateralized loan obligations. He typically structures his clients’ portfolios into time-based buckets for when funds are needed at different stages of life.
“In your 10-year-plus bucket, where you’re starting to make more growth bets, that’s where you might take some duration risk if you felt it’s a good time to do it,” he said. “Right now, we don’t think it’s a good time to take duration bets, so we are not doing that.”
The Janus Henderson AAA CLO ETF, which focuses primarily on AAA-rated CLO tranches, offers a 4.63% 30-day SEC yield with a 0.20% expense ratio, according to Failla.
A Diversified Income Approach
Wells Fargo advocates a diversified income strategy spanning multiple fixed-income sectors. Investment-grade corporate bonds currently offer appealing yields combined with relatively strong credit fundamentals, Alvarado said.
“We favor careful issuer selection and believe short- and intermediate-term maturity corporate bonds offer an attractive balance between income generation and interest-rate sensitivity,” he wrote in a recent note.
In addition, investment-grade municipal bonds are particularly compelling for tax-sensitive investors, he noted. The income is exempt from federal taxes and, for holders who reside in the issuing state, free from state and local taxes as well. The iShares National Muni Bond ETF, for example, carries a 30-day yield of 3.73% and a 0.05% expense ratio.
Allocations to high-yield bonds and U.S. dollar-denominated emerging-market debt are also viable income sources, Alvarado added, favoring a selective approach for both asset classes.
Dividend Stocks and REITs
Opportunities also exist outside traditional fixed income. Failla, for instance, favors real estate and infrastructure funds, particularly within private markets accessible to accredited investors — those with a total net worth exceeding $1 million. Retail investors can explore publicly traded real estate investment trusts, which typically provide solid yields, along with infrastructure funds.
REITs generally underperform the broader market when interest rates climb. In general, dividend stocks appear less attractive when bond yields are elevated, since investors receive higher compensation for lower risk when investing in investment-grade bonds.
Jenny Harrington, CEO of Gilman Hill Asset Management, who specializes in high-yielding stocks with strong fundamentals, believes this time may be different. For one, she said, many dividend stocks are trading at historically muted valuations, as investor capital has gravitated toward growth names. Additionally, when rates have risen in the past, long-dated investments have borne significantly more pressure than dividend stocks, she added.
That is because stocks are ultimately valued at the net present value of their future cash flows, she explained. Furthermore, while elevated bond yields may seem more compelling on the surface, a closer look tells a different story, Harrington said.
“Theoretically, if rates are rising, there’s likely to be inflation accompanying the higher rates,” she said. “The S&P 500’s dividends have grown at an annualized rate of 5.7% per year over the past 60 or so years. That growth in dividends will offset the spending power destruction of inflation — where bonds cannot offer the same income growth to offset inflation.”
