Beaten-up bond market may be nearing ‘escape velocity’ for investors. Here’s what that means

With 10-year treasury yields breaching the 5% market and reaching their highest level since 2007 on Tuesday, the market has been spooked, but bond investors are thinking more seriously about whether this may be an opportunistic moment in fixed-income.

Many investors have focused on short-or ultra-short-term bonds lately to sidestep bond market volatility that has pummeled prices as rates rise due to concerns over broader economic issues like inflation and the federal deficit. But as yields rise, the risk-reward calculation for medium-term bonds — those in the 5-to-10-year range — is becoming more favorable for investors. 

Market-watchers widely expect the Federal Reserve to boost the target federal funds rate by one-quarter of a percentage point on Wednesday amid rising oil prices and the ongoing war with Iran. The move could increase borrowing costs for already strapped consumers. However, there’s a silver lining for bond investors, especially with rates expected to be elevated for an extended time.

“As yields have gotten higher, there’s much more cushion than there was in 2020,” said Alec Lucas, director of fixed income for manager research at Morningstar.

Certainly, more risk-averse investors can buy a money market fund with an attractive yield and take duration off the table, and there is always an opportunity cost in making investment decisions when seeking income, with some investors still preferring stocks that generate attractive yields. But at 5%, a $1 million investment in the 10-year treasury would generate $50,000 a year in yield income alone, or $500,000 over a decade, an investment that could be enticing to wealthy investors seeking low-risk sources of income.

Nevertheless, concerns about bond prices are still elevated and are likely to remain high, and investors can seek a zone within the fixed-income market that opportunistically targets yield while acknowledging the rise in interest rates isn’t over. “If investors want to make sure their money is less prone to react negatively to a further rise in rates, they want to prioritize short-to-medium term duration portfolios,” Lucas said.

Many bond strategists believe that higher yields will remain for a prolonged period.

“Even though the rise in bond yields so far this year has been orderly, and it has not happened overnight, these elevated yields could be here to stay for some time, especially with geopolitical concerns and elevated energy prices continuing to remain front and center,” Carol Schleif, chief market strategist of BMO Wealth Management, wrote in a recent commentary.

Respondents to the CNBC Fed Survey expect at least two rate hikes from the central bank this year.

Here are a few basic factors that investors eyeing opportunities in bonds should be thinking about now.

How the bond ‘price cushion’ works and why it matters

Bond prices have an inverse relationship with yields, so as yields rise, prices drop. But in a rising rate environment, investors have more cushion as prices fall, meaning the prospect for losses is much lower. That is a function of rates having risen so much since the Covid era zero rate bottom in 2020.

“If rates rise more than 1% in a year, you’ll get whipsawed by price volatility. But you won’t get nearly the same losses we saw in 2022 and 2023, because the starting point is so much better,” said Cullen Roche, founder of San Diego-based Discipline Funds, who coined the term “escape velocity” to illustrate how and when bonds can deliver positive returns even if rates rise.

Roche developed a tool to identify the point on the government bond yield curve where the bond yield equals its modified duration. At this point, one year of interest income offsets the price decline from a 1% rise in rates. The bond breaks free from rate risk over the same period in which it earns its coupon. With rates where they are today, “anything five years and lower, you have a cushion. Anything higher, you have less and less of a cushion,” he said.

To illustrate, a buy-and-hold investor holding a bond with a current yield of 4.90% and duration of 5.8 years can tolerate a 0.84% increase in yields before the mark-to-market loss on that bond wipes out one year of interest income, said Michael Reynolds, vice president of investment strategy at Philadelphia-based Glenmede. “We’re more excited about longer-term duration now because the cost of being wrong ends up being lower as rates rise,” he said. 

These concepts are important for investors who are calculating their total return, a measure of an investment’s performance over a specified time period, taking into account price change and interest. If you’re earning more interest, you have more of a buffer or price cushion against falling prices, said Dave Plecha, global head of fixed income at Austin, Texas-based Dimensional Fund Advisors.

If you’re particularly sensitive to price risk, hold shorter duration bonds. A three-year duration, for example, can mute the risk of a price drop, Plecha said. “Your risk tolerance is easy to address,” he said, by adding shorter-duration bonds.

Consider slightly longer fixed-income maturity

Those who can stomach a bit more risk can look slightly longer in duration. This means that investors might start to consider bonds with slightly longer maturities — say five-to-10 years. Reynolds said the “best bang for the buck” looks like the seven- to 10- year time frame. “There’s a lot of volatility the further out you go,” he said.

Scott Helfstein, head of investment strategy at New York-based Global X ETFs, suggests laddering five-to 10-year government bonds. There is still a lot of interest in one-to-three-month bonds, where investors can get 3.5% to 4% without taking on additional risk, he said. However, if you chart the data, going a bit longer out is “a pretty convincing story,” he said, adding that investors are getting the best yields the market has seen in 20 years. Even if they move a little higher, which is possible over the next one to two years, “you’re getting paid better than you did for two decades.”

Ultrashort bond funds led by iShares 0-3 Month Treasury Bond ETF (SGOV) remain the most popular strategy for investors in 2026, with $41 billion of net inflows into SGOV.

Several ETF options can give investors exposure to the bond market. The iShares 1-3 Year (SHY) and 3-7 Year (IEI) treasury ETFs fit within these maturity timelines. For broader bond market exposures, the Vanguard Total Bond Market ETF (BND) is an intermediate-term bond fund with more than 11,000 bonds and an average coupon of 3.9%. Its expense ratio was 0.03% as of April. Another option is the iShares Core U.S. Aggregate Bond ETF (AGG), which has more than 13,000 holdings and an expense ratio of 0.03%. Both of these broad bond market funds hold close to half of their portfolios in treasuries.

Stocks are still favored, but taking gains can be smart

Stephanie Link, chief investment strategist and head of investment solutions at Chicago-based Hightower Advisors, still likes stocks better than bonds because of the growth potential, but said bonds are getting more attractive. The 5% threshold on the 10-year Treasury makes bonds more compelling, and if it stays there for three to six months, more investors will take notice, she said. Investors whose asset allocation is likely skewed more toward stocks because of investment gains might consider taking some of the proceeds and investing in bonds, she said. 

If you get 5% risk-free yield, and you’re willing to hold the bond to maturity, why wouldn’t you start to sell some stocks to get 5% and call it a day, assuming inflation doesn’t run away, which is unlikely, she said. It’s especially compelling, she said, if you think inflation can stay at 2% to 3% over 10 years.