Has the bond selloff gone too far?

The bond selloff appears overextended, making intermediate-duration bonds attractive while tight credit spreads call for selectivity rather than broad credit exposure.

• The 10-year US Treasury yield recently reached 5.36%, its highest level in more than two decades, as resilient growth, renewed inflation concerns, changing Federal Reserve expectations and higher term premium pushed yields higher.
• Long-term inflation expectations remain anchored and the yield curve has flattened as yields rose, suggesting that the move was driven more by repriced Fed-policy expectations than by worsening long-term inflation or fiscal sustainability concerns.
• Asset managers have reduced long-end Treasury futures exposure since the beginning of September, according to CFTC data, while mortgage-related convexity-hedging pressures have diminished, increasing the possibility of a reversal if economic data improve.
• September headline CPI rose 0.6% month over month, gasoline prices increased by more than 9%, core CPI rose 0.3% versus 0.2% consensus, and shelter prices rose 0.4%; the team expects the Fed to hold rates in October but sees renewed hikes as a risk.
• Third-quarter S&P 500 earnings are expected to grow approximately 26.5% year over year, increasingly concentrated in AI-related technology, while investment-grade credit spreads contribute less than 15% of all-in yields versus approximately 45% on average in 2019–2021.

Takeaway: Investors should remain invested for attractive all-in yields, add duration selectively in the intermediate Treasury curve, and emphasize carry, structure and security selection; the preferred opportunities are securitized assets, high-quality municipal bonds and selected emerging-market debt, while tight credit spreads leave little margin for error.