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The Upside of Bond Market Downside

BY | ETF Database
7:53 am ET 09/10/26 | 10 VIEWS
The Treasury market has been bereft of enjoyment for investors this year. The further out on the duration spectrum market participants venture, the more punishment they’re incurring.For example, the iShares 7-10 Year Treasury Bond ETF IEF),, which sports an effective duration of 15.06 years, is off 3.3%. Compounding those problems is the fact that many traditional aggregate bond ETFs are saddled with year-to-date losses. Predictably, macroeconomic forces are among the reasons why bond yields are moving higher. However, some there’s a silver lining in bond market turbulence. “The inflationary shock from the Iran war plays a role, but more important for the Fed is sticky core inflation (which excludes energy prices),” noted Preston Caldwell of Morningstar. “The latter indicates an economy still running slightly hot. AI’s impact on investment and stock prices is playing a key role here; insofar as the AI boost is expected to persist, it boosts the natural rate component of longer yields.”Other Positive SignsYes, these are tough times for fixed income investors and positive signs aren’t always readily apparent. However, as Caldwell points out, there some “good vibes” to consider, including compelling breakeven rates on Treasury Inflation Protection Securities (WTIP), which could heighten the allure of ETFs such as the WisdomTree Inflation Plus Fund (WTIP ). “Meanwhile, breakevens are dirt cheap if you think inflation will run high. Betting on breakevens means going long TIPS and short nominal bonds,” observed Caldwell. “One can capture that exposure by rotating a portfolio from nominal bonds into TIPS. Breakevens currently imply the Fed will essentially hit its 2% target over the next 30 years, so if inflation turns out higher, then you’ll come out ahead. If there’s an inflation crisis, then there’s a lot of upside.” Another point to consider is why the extra yield investors demand for holding longer duration bonds is rising. It’s not necessarily a sign of imminent catastrophe in the bond market. However, the rising premium could very well be a reversion to the mean scenario. “Instead, we interpret the rise in the term premium over the past few years largely as a reversion to its historical average,” added Caldwell. “This follows more than a decade in which the term premium was compressed by central bank purchases, along with macro risks being concentrated on the deflationary side for which long-term bonds are an attractive hedge.” For more news, information, and analysis, visit the Fixed Income Content Hub.

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