Surging Treasury yields have rattled Wall Street, but there may also be an opportunity lurking for income investors to turn a profit. The benchmark 10-year Treasury touched 5% on Monday , a high not seen since October 2023. It has since given back some of that yield and is currently around 4.96%. Bond yields move inversely to prices. That bouncing around will likely persist as yields stay elevated, said Luis Alvarado, co-head of fixed-income strategy at Wells Fargo Investment Institute. “We’re just going to continue to see knee-jerk reactions to the economic data, the Fed, oil, anything that happens,” he said. “Brace yourself for more volatility.” The focus is now on the Federal Reserve ‘s next interest rate decision that will come at the conclusion of its two-day policy meeting on Wednesday. The market is pricing in 90% odds of a hike, according to the CME FedWatch tool . President Donald Trump has pushed for Fed Chairman Kevin Warsh to reduce the fed funds rate from its current 3.50% to 3.75%, although the chairman hinted at the central bank’s recent gathering in Jackson Hole that rates could move higher if progress isn’t made in fighting inflation. The latest reading of the consumer price index showed a 3.4% increase in August compared with a year ago, in line with Wall Street estimates but above the Fed’s 2% target. “If rates don’t go up at this point, then the Fed loses a lot of credibility, and if you think higher rates are painful, wait until you see the kind of pain that you see if the Fed loses credibility,” said certified financial planner Chuck Failla, founder of Sovereign Financial Group. Mind duration With the volatility in the bond market sticking around, investors should stay away from the long end of the yield curve, since long-dated bonds are the most sensitive to interest rate fluctuations — known as duration, said JoAnne Bianco, senior investment strategist at BondBloxx. Investors have plenty of paths to generate income in the short- to intermediate part of the curve, including BBB-rated corporates, high yield bonds and emerging market debt, she said. “The higher yields may be here to stay,” Bianco said. Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, suggests staying below the duration of the Bloomberg U.S. Aggregate Bond Index, which currently means less than six years. “Yields are still near the high end of their, call it, 16 or 17 year trading range, and if there [have] been investors who’ve been waiting for a sign or waiting for an opportunity to lock in attractive yields, we still think they’re there,” he said. For instance, the Schwab 1-5 Year Corporate Bond ETF currently has a 4.95% 30-day SEC yield and 0.03% expense ratio. SCHJ YTD mountain Schwab 1-5 Year Corporate Bond ETF year to date Martin believes the 10-year Treasury note at 5% could also be a psychological level for investors. “We think 5% would probably lure in potential buyers who haven’t necessarily decided to move out further on the curve yet,” he said. Failla is adding in some floating rate exposure, such as bank loans and collateralized loan obligations. He typically breaks his clients’ investments into buckets for when money is needed at different times in their lives. “In your 10-year-plus [bucket], where you’re starting to make more growth bets, that’s where you might take some duration risk if you felt it’s a good time to do it,” he said. “Right now, we don’t think it’s a good time to take duration bets, so we are not doing that.” The Janus Henderson AAA CLO ETF , which focuses primarily on the AAA-rated CLO tranches, has a 4.63% 30-day SEC yield and a 0.20% expense ratio. JAAA YTD mountain Janus Henderson AAA CLO ETF year to date Diversified income approach Wells Fargo advocates a diversified income approach across multiple fixed-income sectors right now. That includes investment-grade corporate bonds, which have attractive yields and relatively strong credit fundamentals, Alvarado said. “We favor careful issuer selection and believe short- and intermediate-term maturity corporate bonds offer an attractive balance between income generation and interest-rate sensitivity,” he wrote in a note Monday. In addition, investment-grade municipal bonds are particularly attractive for tax-sensitive investors given their solid yields, he noted. The income is exempt from federal taxes and, if the holder also lives in the state where the bond is issued, free from state or local tax. The iShares National Muni Bond ETF has a 30-day yield of 3.73% and a 0.05% expense ratio. MUB YTD mountain iShares National Muni Bond ETF year to date Lastly, allocations to high-yield bonds and emerging-market debt denominated in U.S. dollars are also a good source of income, Alvarado said. He favors a selective approach for both assets. Dividend stocks and REITs There are also opportunities outside of fixed income. Failla, for example, likes real estate and infrastructure funds, particularly in the private markets for accredited investors — which means those with a total net worth above $1 million. Retail investors can look into publicly traded real estate investment trusts , which typically offer solid yields, and infrastructure funds, he said. REITs generally underperform the market when interest rates rise. In fact, dividend stocks in general look less appealing when bond yields are elevated, since investors are receiving higher compensation for less risk if the bonds are rated investment grade. Jenny Harrington, who as CEO of Gilman Hill Asset Management focuses on high-yielding stocks that have good fundamentals, believes this time is different. For one thing, the stocks are trading at extremely muted valuations, since investors’ money has poured into growth names, she said. In addition, when rates have increased, long-dated investments have come under significantly more pressure than dividend stocks, she added. That’s because stocks are ultimately valued at the net present value of their future cash flows, she explained. Lastly, while elevated bond yields can seem more compelling than a high-yielding dividend stock, that is not really the case when you look beneath the hood, said Harrington. “Theoretically, if rates are rising, there’s likely to be inflation accompanying the higher rates,” she said. “The S & P 500’s dividends have grown at an annualized rate of 5.7% per year over the last 60ish years … So that growth in dividends will offset the spending power destruction of inflation – where bonds cannot offer the same income growth to offset inflation.”
