Wall Street Has a New Fear: The Bond Market

Wall Street’s attention is shifting toward the bond market as long-term US borrowing costs climb into territory not seen for nearly two decades.

Bank of America’s September Fund Manager Survey identified a disorderly rise in government bond yields as the leading tail risk, with the US 10-year Treasury yield now above 5%, its highest level since 2007.

The surge has also cast doubt on how much relief can come from larger Treasury buybacks. The program is designed to improve liquidity and trading conditions, but fund managers largely question its ability to bring yields down. In the BofA survey, 46% said buybacks would have no meaningful effect on Treasury yields, while 29% said the measures could fail to contain rising borrowing costs. Just 16% expect them to produce a sustained decline in long-term yields.

Pressure Goes Beyond Liquidity

Buybacks may help the Treasury market function more smoothly, but the forces pushing yields higher run deeper. Persistent inflation concerns are being compounded by heavy government borrowing, uncertainty over the fiscal outlook and higher term premiums, all of which have added pressure to longer-dated debt.

Fund positioning reflects that unease. Managers were a net 48% underweight bonds in September, the most bearish allocation since May 2022. They have now maintained an underweight position for 17 consecutive months, according to BofA, showing that the rise in yields has yet to generate a broad return to government debt.

Is 6% the Level That Brings Buyers Back?

For a significant group of fund managers, current yields still do not offer enough incentive to move money out of equities. More than a quarter of respondents said they would need more attractive levels before making a substantial rotation into government bonds, with a US long-bond yield of around 6% cited as one potential threshold.

A further rise in yields could eventually make bonds attractive enough to draw buyers back, but reaching those levels would come with consequences elsewhere. Equities could face additional pressure, companies would encounter higher financing costs, mortgages could become more expensive, and the US government would have to absorb an even larger interest burden on its debt.

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