Known risks and increasingly compelling fixed-income valuation

Fixed-income valuations have become sufficiently attractive for investors to modestly add duration and selectively increase exposure despite near-term pressure on yields.

• The 10-year US Treasury yield reached 5.25% and the 30-year yield approximately 5.60% in late September 2026, their highest levels since 2007 and in more than two decades, respectively.
• Markets are pricing nearly four additional quarter-point Federal Reserve hikes and a terminal rate close to 5%, which Schroders considers aggressive given emerging stress in housing and among lower-income consumers.
• The sell-off is global: 10-year German Bund yields reached approximately 3.65%, Japanese government bond yields around 3%, and UK gilt yields their highest level since 2008.
• Most of the rise in Treasury yields has reflected higher real yields and expected policy rates rather than a material increase in long-term inflation expectations, while technical selling in futures has amplified the move.
• With two-year Treasury yields near 5%, yields would need to rise above approximately 7.5% over the next year for a comparable-maturity investor to suffer a negative total return, assuming current carry conditions.

Takeaway: Investors should modestly extend duration, particularly in the two- to five-year sector, selectively add agency MBS and maintain a constructive view on emerging-market debt, while remaining selective in credit because spreads are tight and issuance is elevated.