The value of discipline when it matters most

Higher bond yields have improved the long-term opportunity in fixed income, but investors should favor one- to three-year maturities while remaining cautious on long-duration debt.

• The Federal Reserve raised rates by 25 basis points, while US Treasury yields reached levels last seen in 2007 amid resilient growth, sticky inflation, elevated fiscal deficits and uncertainty about the neutral rate.
• The expected economic slowdown did not materialize: markets had anticipated several Fed cuts, but growth remained resilient and the Treasury market tightened financial conditions as yields moved higher.
• The 10-year US Treasury yield is near 5%, which the author considers an attractive level for dollar-cost averaging into fixed income despite recent negative total returns.
• Over shorter horizons, rate changes dominate bond performance, whereas over longer periods coupon income has historically been the main source of total return and higher starting yields can improve future return potential.
• One- to three-year maturities offer an attractive balance between income and interest-rate risk, while inflation, government borrowing needs and policy uncertainty remain headwinds for longer-duration bonds.

Takeaway: Investors should look beyond recent bond losses and use higher yields to rebuild fixed-income exposure, emphasizing the front end of the curve while recognizing that energy prices, fiscal risks and policy-rate uncertainty could keep volatility elevated.