The US bond market has been rife with noise lately, with the 10-year Treasury yield hitting its highest level since 2023 on Wednesday (September 2nd). The factors unsettling investors haven't disappeared. On one hand, the Treasury is planning bond buybacks; on the other hand, the Federal Reserve's latest signals of a possible interest rate hike run counter to President Trump's wishes. Against the backdrop of broader inflation concerns, a federal deficit of approximately $2 trillion, and over $40 trillion in government debt with no signs of abating, many bondholders are feeling confused about the future.

Don't let the noise sway you; first, figure out if things have actually changed.

“Blocking out the noise is one of the hardest things for anyone to do,” said Ian Toner, partner and head of institutional advisory investments at Cerity Partners in New York. Nevertheless, he cautioned investors considering adjusting their portfolios based on headlines to first consider whether there has been a fundamental, long-term shift in the economy or markets, or simply a reaction to short-term news. “Most news is short-term, and most portfolios should be long-term,” he said. “That intersection is emotionally difficult, but crucial for success.” Financial advisors and investment strategists say investors have ample options to weather the uncertainty in the bond market without having to rush into potentially disastrous decisions.

Rising yields aren't necessarily a bad thing: bonds aren't dead.

The yield curve is currently rising across the board. Despite the Trump administration's attempts to appear calm, this could still frighten markets. But for buy-and-hold investors, higher yields may be a good thing. Marta Norton, chief investment strategist at Empower in Denver, said, "To me, this is a positive sign for future returns because, overall, bond yields are higher now. I don't think bonds are dead. They may no longer have the tailwinds they've had in recent decades, but they still have a place for investors and portfolios."

Diversified maturity structures: from ultra-short to medium- to long-term

Toner stated that as long as investors have plans to diversify within the fixed income space, most uncertainties are likely to stabilize and become clearer. Strategists point out that a diversified portfolio could include: broad-based market ETFs such as the iShares Core U.S. Aggregate Bond ETF (AGG), short-duration ETFs, Treasury Inflation-Protected Securities (TIPS), corporate bonds, and some floating-rate bonds. It's worth noting that AGG has experienced significant drawdowns since 2020, recording substantial losses even after reinvesting bond coupons. This is because yields have continued to rise since the near-zero interest rate environment during the pandemic reversed, depressing bond prices. AGG is also highly concentrated in Treasury bonds, with approximately 45% allocated, which could continue to pose a headwind. However, given the current high yields, AGG's buffer against bond price volatility is much larger than when interest rates were near zero. Some prominent figures in the market have warned that holding any exposure to Treasury bond duration is a mistake, as uncertainty related to government debt and the Federal Reserve's anti-inflationary policies could continue to push up interest rates, at least in the short term. More and more investors are turning to ultra-short-term bond ETFs, with these funds seeing inflows of $12.8 billion in July, according to Morningstar data. Financial strategists say these funds offer slightly higher yields than money market ETFs or mutual funds, with only slightly higher risk. Another option among short-term bond ETFs is the PIMCO Low Duration Fund (PTLDX), with a duration of 1 to 3 years and an adjusted expense ratio of 0.46%. At longer maturities, bond strategists are looking for strong areas across the broader bond market. Mark McCarron, chief investment officer at Philadelphia-based Wescott Financial Advisory Group, who has consistently favored bonds with durations of 3 to 5 years or less, stated, “Bond yields are likely to continue rising until inflation and deficits are under control. We just want to stick to high quality, short duration, and protection.” Erik Kratz, chief investment officer and co-head of wealth at Arena Private Wealth in Chicago, has been buying 5- to 7-year U.S. Treasury bonds with yields in the 4.51% to 4.63% range. He stated, "I think this is a good middle ground."

Opportunities in Corporate Bonds and Floating Rate Bonds

Klatz said he is also buying high-quality corporate bonds, looking for opportunities at 5% and above. He described it as a "good deal with relatively low risk" compared to Treasury bonds. For senior bonds, he is looking for opportunities above 6%. Ken Roban, partner and managing director of Reservoir Road Wealth Management at Steward Partners in Stanford, Connecticut, said he is buying shorter-term corporate bonds. He uses actively managed ETFs, such as the Dimensional Short Duration Fixed Income ETF (DFSD), which has a net expense ratio of 0.16% and held 1,593 bonds as of July 31. Roban also likes the Neuberger Berman Short Duration Income ETF (NBSD), which has a net expense ratio of 0.35% and held 1,104 bonds as of August 31. While he currently sticks to short-term corporate bonds, he said he is considering a shift to a longer-term corporate bond strategy. He stated, "I'm waiting for some sign of fiscal restraint from the U.S. government, which is something I'm watching closely." Klatz is also looking for opportunities in short-term floating-rate bonds, which would repric if interest rates rise, allowing investors to gain more. His focus is on high-quality issuers with senior debt rated A or higher. The idea is this: lock in a yield of around 5% for six months, and if the bond is repriced after six months, not yet due, or redeemed, he could potentially earn 6% on the new coupon. He said, "That's quite attractive to me."

Inflation Hedging: TIPS and Gold

Robin is starting to purchase TIPS for clients' retirement accounts, building a ladder with maturities ranging from 5 to 15 years. He says that if inflation stays in the 3% to 4% range, this is a good deal, meaning you get about 2.4% real return, and when the TIPS mature, you get the higher of the inflation-adjusted price or the original principal—never less than the original principal. Another option for hedging against inflation is commodities, including gold. Norton suggests that investors concerned about fiscal policy and geopolitics could consider allocating 5% to 10% of their portfolio's bond portion to gold. However, it's important to note that gold did not perform as expected as anticipated last year, so a light position is still advisable. "Commodities are unpredictable," Norton says.

If you don't want to hold the debt, don't rush to convert it into cash.

Jeff Mortimer, founding partner and chief investment officer of Elyxium Wealth in Beverly Hills, California, has been moving funds out of bonds for months. His firm is focusing on other income-oriented investments such as M&A arbitrage ETFs and actively managed M&A arbitrage funds. M&A arbitrage uses the price difference between the announcement and completion of a merger to provide returns uncorrelated with interest rate risk. According to Morningstar, this strategy offers bond-like risk-return characteristics outside the fixed-income market: "limited upside, bond-like coupons, but potentially significantly larger downside if the deal falls through." In a recent social media post, Mortimer wrote, "We believe the long-term bond bull market is over, and the investment approach should shift towards reducing fixed-income exposure, shortening duration, and diversifying into other asset classes to manage rising debt and interest rate risk. These asset classes may include commodities and liquid alternative investments." Some investors might want to move entirely from bonds to cash, but McCallum advises against it, as cash doesn't keep pace with inflation. Instead, he takes a more balanced approach. McCallen stated, "We want to maintain a certain duration in the portfolio to generate returns and keep the portfolio balanced during economic slowdowns, but you don't want to hold positions for too long."

Conclusion

Facing the triple pressures of rising yields, high deficits, and fluctuating policies, bond market investors are at a crossroads. Five strategists offer similar advice: don't be swayed by short-term headlines; use diversified fixed-income portfolios, short-duration strategies, TIPS, and gold hedging to mitigate uncertainty. Bonds may not be dead, but the era of easy profits is certainly over. Until inflation and deficits are under control, caution, diversification, and flexibility may be the optimal solution for navigating the bond market's turbulent waters.