Bonds Make a Comeback on Wall Street as BlackRock, Pimco, JPMorgan, Goldman Sachs and Vanguard Map Out Strategies

U.S. Treasury yields hovering around 5% are putting bonds back in the spotlight on Wall Street. While equity investors remain focused on the artificial-intelligence boom and corporate earnings, major financial firms including BlackRock, Pimco, JPMorgan, Goldman Sachs and Vanguard are looking for ways to capitalize on higher fixed-income yields.

The appeal goes beyond the possibility that bond prices could rise if interest rates fall. At current yield levels, investors can lock in meaningful income simply by buying bonds now.

Where to invest, however, is far from settled. BlackRock favors high-grade corporate debt, Pimco prefers mortgage-backed securities, and JPMorgan sees opportunity in long-dated Treasuries and a range of credit products. Goldman Sachs likes both Treasuries and equities, while remaining cautious on corporate bonds.

1. Why Bonds Are Back as Treasury Yields Near 5%

The rise in the 10-year Treasury yield to around 5% has made bonds more attractive. Investors can now earn substantially more by buying U.S. government debt than they could during the era of ultralow rates.

Higher yields reflect inflation, the U.S. fiscal deficit and rising funding demand from private companies.

If price pressures persist, the Federal Reserve could keep policy rates elevated or raise them further. Investors demand higher bond yields to compensate for that uncertainty.

Heavy Treasury issuance is another factor. As supply increases to help finance the fiscal deficit, the U.S. government may have to offer higher yields to attract capital.

Funding demand tied to AI data centers and power infrastructure is adding to the pressure. The U.S. government and large technology companies are raising large sums in the bond market at the same time, increasing supply.

Long-term Treasury yields are also influenced by the term premium, the additional compensation investors demand for lending over longer periods. As uncertainty over inflation, fiscal deficits and future monetary policy rises, investors may require higher yields on long-dated bonds.

Rising yields hurt existing bondholders because prices fall. For investors buying new bonds, though, that shift can create opportunity.

Bond returns generally come from two sources: interest income and capital gains.

A bond with a $1,000 face value and a 4% coupon, for example, pays $40 in annual interest. Even if its market price falls to $900 as yields rise, the coupon payment does not change.

In that case, the annual interest yield based on the purchase price rises to about 4.44%. If the bond is held to maturity, the yield to maturity would be higher still once the gap between face value and purchase price is included.

When market rates fall, the reverse happens. Existing bonds rise in value because they pay more interest than newly issued debt.

That means investors can profit not only from the income they collect while holding bonds, but also from price gains when rates decline.

A high starting yield can also provide a cushion, absorbing part of the loss if bond prices fall further as rates rise.

2. BlackRock Likes High-Grade Credit; Pimco Favors MBS

BlackRock, the world's largest asset manager, is focused on corporate bonds issued by companies with strong credit quality.

Rick Rieder, BlackRock's chief investment officer for global fixed income, told CNBC recently that investors can build a bond portfolio with an average credit rating of A-, duration of less than three years and yields above 7% annually.

An A- rating is relatively high within the investment-grade category. Duration measures how sensitive a bond's price is to changes in market interest rates.

A bond with a modified duration of three years, for example, would lose roughly 3% in price if market yields rose by 1 percentage point. A bond with a modified duration of 10 years could fall about 10% on the same move.

BlackRock is emphasizing a strategy that keeps duration relatively short while capturing high income.

Its iShares Flexible Income Active ETF raised its allocation to investment-grade corporate bonds to 14.3% from 8.5% in July.

The firm is paying particular attention to bonds issued by large technology companies that generate substantial cash flow. AI-related borrowing is increasing, but debt-servicing capacity still varies widely by issuer.

Pimco, by contrast, sees mortgage-backed securities as relatively attractive.

MBS are securities backed by principal and interest payments from pools of home mortgages. Pimco is focused on agency MBS, which carry guarantees from U.S. government agencies or government-sponsored entities.

Those securities have a different credit-risk profile from ordinary corporate bonds. Instead, they carry the risk that homeowners prepay their mortgages when rates fall.

If mortgage rates decline, borrowers may refinance into cheaper loans and pay off existing debt early. MBS investors may then receive principal sooner than expected and have to reinvest it at lower rates.

Even so, Pimco views MBS valuations and yields as attractive after accounting for that risk.

Dan Ivascyn, Pimco's group chief investment officer, has said bonds could generate annual returns of 7% to 8% over the next few years.

Data show the $222 billion Pimco Income Fund had a 36% allocation to agency MBS and 17% to non-agency MBS, while corporate bonds accounted for just 9%.

If BlackRock sees opportunity in high-grade corporate debt, Pimco is finding relatively attractive terms in MBS.

3. JPMorgan Bets on Continued Expansion; Goldman Sachs Likes Stocks and Treasuries

JPMorgan Asset Management is leaning toward the view that the U.S. and global economies will continue to expand.

In its fourth-quarter bond outlook published in September, the firm put the probability of continued expansion at 85%.

It assigned a 45% chance to growth running faster than the economy's normal pace and a 40% chance to growth continuing at a slower-than-normal rate. It put the odds of a recession at 5% and the probability of a severe shock hitting the economy or financial markets at 10%.

JPMorgan's relatively upbeat view rests on government spending, corporate capital expenditure and resilient consumption.

The firm also pointed to capital investment spreading beyond AI into other industries.

If the expansion continues, companies may be able to sustain revenue and profit, supporting their ability to repay debt. That would be a favorable backdrop for corporate bonds and other credit products.

JPMorgan is also finding opportunity in long-dated Treasuries.

The firm said the 10-year Treasury yield could fall to 4.5% to 4.75% even if the Fed raises rates again.

Markets have already priced in a substantial amount of further tightening, and the central bank's response to inflation could help stabilize long-term yields.

If long-term Treasury yields fall, existing Treasury prices rise. Investors in long-dated government bonds could then benefit from capital gains as well as income.

JPMorgan highlighted AAA-rated collateralized loan obligations, emerging-market debt, long-dated Treasuries and municipal bonds as attractive areas.

Goldman Sachs has laid out a strategy that favors both equities and Treasuries.

In an analysis published on October 8, Goldman Sachs Research said stocks may be more attractive than bonds over the next few months.

That view rests on expectations for earnings growth.

If AI investment and productivity gains translate into real profit growth, stocks could keep rising even in a high-rate environment.

At the same time, the firm recommended increasing exposure to 10-year U.S. Treasuries.

Yields are high enough to offer meaningful income, and if the economy slows more quickly than expected, Treasury prices could also rise as yields fall.

The bank remained comparatively cautious on corporate bonds.

Credit spreads on corporate debt remain narrow, leaving too little extra return over Treasuries to justify the additional risk.

Heavy bond issuance by AI companies is another concern. As supply rises, new issuers may have to offer higher yields, putting downward pressure on prices of outstanding corporate bonds.

Goldman Sachs is effectively arguing for upside from earnings growth in equities, income and recession protection in government bonds, and less exposure to corporate credit risk.

Vanguard has also said elevated bond yields can provide an attractive starting point for long-term investors.

In its bond strategy published in September, the firm highlighted that yields on the Bloomberg U.S. Aggregate Bond Index, which includes U.S. Treasuries, investment-grade corporate bonds and MBS, had climbed above 5%.

High-quality bonds with short- to intermediate-term maturities could offer not only strong income but also roll-down benefits.

Roll-down refers to the price gain that can occur when the yield curve slopes upward and a bond's remaining maturity shortens over time, moving it to a lower-yield point on the curve.

A five-year Treasury bought today, for example, would become a four-year security after one year. If the yield curve is unchanged and four-year yields are lower than five-year yields, the bond's price could rise.

Reinvestment risk is another important variable.

Even if an investor earns 5% annually on a three-month Treasury bill, that return may be hard to maintain if market rates fall to 3% after the bill matures.

By contrast, buying a three- or five-year bond allows investors to lock in a relatively high yield for longer.

4. AI Investment Boom Spurs Surge in Corporate Bond Issuance

The AI investment boom is also changing the structure of the U.S. corporate bond market.

In the past, enthusiasm around AI centered mainly on stronger sales for chipmakers such as Nvidia and earnings growth at big technology companies.

But as vast sums are being poured into data centers, semiconductors and power infrastructure, investors are paying closer attention to the burden of financing that buildout.

According to LSEG data, bond issuance this year by Alphabet, Amazon, Meta and Oracle reached about $228.4 billion through October 20.

Companies are using the proceeds to build data centers and buy GPUs and networking equipment.

The increase in corporate bond issuance is creating new opportunities for bond investors. It could also heighten the risk of price declines as supply expands.

If the U.S. government is issuing large amounts of Treasuries to finance fiscal deficits while big technology companies are also selling more debt, competition for investor capital could intensify.

Not every AI-linked corporate bond carries the same risk.

Large technology companies such as Alphabet and Amazon generate huge cash flow from existing businesses including search, advertising, e-commerce and cloud computing.

Even if returns on AI investment fall short of expectations, those companies have relatively strong capacity to repay interest and principal using cash from their core businesses.

CoreWeave, by contrast, has relied heavily on borrowing to fund large-scale data-center construction and GPU purchases.

Its business is growing quickly as demand for AI computing rises. But it also faces heavy investment costs and debt-servicing burdens.

The recent surge in CoreWeave's corporate bond yields and credit-default swap spreads reflects concern over that credit risk.

A CDS is a contract that lets investors buy protection against the risk that a bond issuer defaults. A wider CDS spread means the market is assigning a higher level of credit risk to that company.

Another risk is that GPUs could lose economic value quickly.

When new GPUs are released, older equipment can lose competitiveness. A company's debt burden does not automatically shrink with it.

That means some companies could struggle to raise funding even as AI grows rapidly because investment costs and debt-repayment pressures remain high.

For that reason, bond investors need to look beyond high yields and examine an issuer's credit rating and cash flow.

In general, BBB- and above is considered investment grade, while BB+ and below is classified as high yield.

Investment-grade corporate bonds are issued by companies with relatively stable debt-repayment capacity. Bonds from lower-rated issuers, including those rated CCC, can be more vulnerable if growth slows and funding conditions worsen.

Even if both offer a 7% annual yield, a diversified portfolio of high-quality bonds carries a very different risk profile from a single bond issued by a highly leveraged company.

5. Oil Jumps, Treasury Yields Fall: Which Bonds Could Benefit Next?

The U.S. bond market recently delivered an unusual signal: Treasury yields fell sharply even as global oil prices surged.

Brent crude settled at $113.17 a barrel on October 22, up about 4%.

The yield on the 10-year U.S. Treasury, by contrast, fell 19.3 basis points to 4.953%, the biggest one-day drop since March 2023.

Normally, higher oil prices fuel inflation concerns and push Treasury yields higher.

Rising energy costs increase production and transportation expenses for businesses and add pressure to consumer prices.

This time, however, concern over slower growth and financial-market instability outweighed fears of inflation.

If oil stays high for a prolonged period, consumer purchasing power may weaken and corporate cost burdens may rise, slowing economic growth.

At the same time, concern over the profitability of AI investment triggered a sharp selloff in technology shares, reinforcing demand for safer assets.

The Nasdaq fell 2.6%, while the Philadelphia Semiconductor Index dropped 6.7%.

Money flowed out of risk assets such as stocks and into U.S. Treasuries. Treasury prices rose and yields fell.

The direction of Treasury yields depends not only on inflation, but also on the growth outlook and investors' appetite for risk.

If rates rise further from here, shorter-duration bonds may hold up better because their prices are less sensitive than long bonds to higher yields.

If concern over slowing growth intensifies and long-term Treasury yields fall, longer-duration government bonds could offer larger capital gains.

A bond with a modified duration of 10 years, for example, could rise roughly 10% in price if its market yield falls by 1 percentage point.

If the expansion continues, income from high-grade corporate bonds could remain attractive. If revenue and profit stay firm and credit spreads tighten, corporate bond prices could also rise.

In a recession, by contrast, companies' debt-repayment capacity may weaken and credit spreads on corporate bonds may widen. In that case, U.S. Treasuries could become the more favorable investment.

Rising bond supply is another key variable. If Treasury issuance by the U.S. government and corporate issuance by AI companies both increase, market rates could face additional upward pressure.

In the end, bonds have become more attractive again, but not every segment offers the same opportunity.

BlackRock is focused on short-duration, high-grade corporate debt. Pimco favors MBS. JPMorgan likes long-dated Treasuries and a range of credit products. Goldman Sachs prefers stocks and Treasuries while staying cautious on corporate bonds, and Vanguard is emphasizing the role of high-quality bonds in long-term asset allocation.

With U.S. Treasury yields near 5%, bonds have re-emerged as a major investment target. Future returns are likely to depend less on the absolute level of yields than on how investors judge changes in growth, inflation and credit risk, and which types of bonds they choose.

Park Shin-young, New York correspondent, Hankyung.com nyusos@hankyung.com