MW Where to invest in bonds right now after the market's violent selloff
By Joy Wiltermuth
'There's just so much day-to-day volatility,' one strategist notes
Stocks hit fresh record highs Tuesday while bond yields fell on optimism around a U.S.-Iran peace deal.
The bond market is tied up in knots about the Iran war and inflation, as well as what the Federal Reserve under new chair Kevin Warsh might do about it.
There's dread about depleting global oil supplies and hopes around a deal to end the Iran war. There are questions about appetite for Treasurys, plus Warsh's call for "regime change" at the Fed and what that might look like in the coming months.
"There's just so much day-to-day volatility," said Mike Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management, on Tuesday. That means it's probably too early to call a near-term top, he added.
An easy conclusion to make would be that Iran headlines likely keep the $30 trillion U.S. Treasury market on edge. The harder thing to know is how long American households can keep absorbing rising inflation, higher borrowing costs and roughly $4.50-a-gallon gas prices before it hurts the economy.
President Trump stoked optimism around the Iran war ending over the long holiday weekend by saying a deal was close. News reports indicate the deal framework would reopen the Strait of Hormuz, allowing Persian Gulf crude to resume flowing through the waterway. This comes as commodity experts say dwindling global supplies raise the risk of a full-blown crisis by early June.
The reaction Tuesday was "pretty bullish," Lorizio said, adding that there also was a "fair amount of price discovery going on."
In a rally, bond investors demand less compensation to act as lenders, which causes yields to drop. Yields were lower Tuesday after touching some of their highest levels since 2007 last week. The inflation-sensitive 30-year Treasury rate BX:TMUBMUSD30Y was around 5.03%, down from a high of about 5.19% last week. The 10-year Treasury yield BX:TMUBMUSD10Y was near 4.49%, off its one-year low of about 4% in early March.
Yet the 2-year Treasury yield BX:TMUBMUSD02Y still was at 4.05% Tuesday, above the Fed's own upper limit of its short-term policy rate.
The mismatch suggests that Wall Street expects there to be a real possibility of Fed interest-rate hikes, particularly with inflation moving away from the central bank's 2% yearly target. That could limit Warsh's options during his first meeting at the centrak bank's helm on June 16-17.
"In our view, the likely path - or the most sensible move - is to do nothing: not hike and not cut," said Charlie Ripley, a portfolio manager at Allianz Investment Management.
For anyone who thinks the Fed under Warsh isn't going to be "squarely in a rate-hiking mood," the 2-year Treasury yield above 4% looks pretty attractive, Ripley said. The 10-year Treasury yield also could see limited upside beyond 4.5% - unless the Fed ends up hiking rates, he noted.
See: Kevin Warsh's Fed isn't cutting interest rates any time soon. But a hike isn't yet on the table, either.
That could be the case - but Yulia Alekseeva, head of fixed income at MissionSquare, said she isn't rushing to add longer-duration exposure nor ruling out the 10-year Treasury yield pushing higher. With that risk, she's sticking to Treasurys in the 2-year to 7-year range.
"The question in everybody's minds is why there was such a violent selloff," Alekseeva told MarketWatch Tuesday. She sees evidence of the growing U.S. debt load relative to the economy as playing a central role, especially when it comes to longer-duration yields.
Bigger picture, there are reasons to expect this time to be different than 2022, when the Fed started hiking rates from nearly zero to quell inflation near a 40-year high. That process left both bonds and stocks with historic losses.
For one thing, bonds now offer higher starting yields that can better protect portfolios if stocks falter and inflation remains problematic. Recent consumer survey data also highlights the extremely pessimistic mood about the economy, despite the stock market SPX sitting near record highs.
Related: This bear-market signal Wall Street ignores is putting your money at risk right now
"There's reason to believe that while inflation is ticking higher, the consumer isn't in a perfect spot to absorb this," said Lorizio at Manulife. Rates can move higher in near term, he said, but an inability of consumers to keep pace "should anchor rates a bit lower."
-Joy Wiltermuth
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May 26, 2026 17:04 ET (21:04 GMT)
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