When the 10-year Treasury yield quickly rose from less than 4% on April 4, to 4.5% on April 8, it was a dour omen, much like a hurricane warning, for investors. Treasurys are commonly viewed as a safe haven during uncertain periods, so any increase in their yields can be linked to liquidations, or even worse, a sell-off.
The 10-year Treasury had retreated to about 4.21% and the two-year yield to 3.67% on May 1, below the fed funds range of 4.25% to 4.5%, prompting a media comment from Treasury Secretary Scott Bessent that the Federal Reserve “should be cutting” rates.
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U.S. Treasurys: The Waffle House of Global Finance
The U.S. Treasury market plays a vital role in financial markets across the globe. It’s an important conduit for the Federal Reserve’s monetary policy and promulgates a benchmark, risk-free yield curve relative to risky assets. Financial intermediaries and individual investors alike rely on the Treasury market for daily liquidity and expect Treasury prices to always remain relatively stable. In a real sense, the U.S. Treasury market is the Waffle House of global finance: It needs to stay open and reliable, even in a storm.
Investors have an ample supply of speculations on why Treasury yields rose and prices declined in early April, ranging from tariff negotiations to concerns about demand for U.S. government bonds and liquidity demands from hedge-fund traders. Steve Friedman, senior macroeconomist and head of macro and quantitative solutions at MacKay Shields, suggests that the rise in longer-term yields “is likely due to a confluence of factors, including basis trade unwinds, foreign sellers and hedging activity. Heightened uncertainty and a crisis of confidence in the direction of U.S. policy is also contributing to an increase in the term premium.”
Bessent has cautioned against a rush to judgment about short-term volatility in the market and reaffirmed the federal government’s commitment to a strong dollar. “We are still a global reserve currency,” he has said.
Still, what the recent price and yield volatility among Treasurys portends for investors going forward is a different story, one that might benefit from an unconventional lens.
Enter the Waffle House Index
In the aftermath of Hurricane Katrina, Craig Fugate, former administrator of the Federal Emergency Management Agency, created the Waffle House Index as an informal metric to gauge the severity of natural disasters, particularly hurricanes.
Here’s how this index works:
— Green: Waffle House is open with a full menu (minimal impact).
— Yellow: Waffle House is open with a limited menu (moderate disruption).
— Red: Waffle House is closed (severe disaster).
If the Waffle House Index were applied to investor sentiment in April, we’d likely see a mix of green and yellow. But while the Treasury market remains open and functioning, many investors’ appetite for risk is clearly dimming. According to an April 16 survey by the American Association of Individual Investors, nearly six in 10 investors are currently bearish.
[SEE: 9 Best Municipal Bond Funds to Buy and Hold.]
Bond Strategy: Think Stability Over Sizzle
In an environment like this, bond investors don’t need to settle for a limited menu. The lights are on, and the kitchen’s open. The key is choosing with intention. Here’s what a thoughtful, well-diversified bond strategy might include today:
High-Quality Bonds
High-quality bonds can serve as ballast in a volatile market. Think stability over sizzle. Vanguard’s 10-year return estimates for U.S. aggregate bonds stand at an annualized 4.7% to 5.7%, and for global ex-U.S. currency-hedged bonds, they’re at 4.3% to 5.3%.
Look for investment-grade bonds that have a lower risk of default; in other words, they receive higher ratings from credit rating agencies of “BBB” or “Baa” and above. They are usually issued at lower yields than riskier bonds, but they will be the bread and butter of your bond portfolio.
Global Bonds
Global bonds help diversify interest rate exposure and unlock opportunities outside the U.S., especially in regions where central banks may move at a different pace than the Fed. Since 2022, the European Central Bank has implemented seven interest-rate cuts, bringing its main rate down to 2.25% as of April 17. These cuts have aimed to stimulate the eurozone economy amid challenges, like escalating trade tensions and subdued growth.
For bond investors, these rate cuts have been supportive for European bonds, particularly those at the short end of the yield curve, where rates have been falling the fastest. Lower policy rates mean yields on newly issued short-term bonds are declining, making existing bonds with higher coupons more attractive.
Takeaway: Keep a Close Eye on the Fed
Rate cuts could reshape the yield curve and create new entry points. As of May 1, the CME FedWatch Tool indicates a 71.5% probability of at least a full percentage point in cuts by year-end.
Just as a full Waffle House menu may offer comfort and variety, today’s bond market has options. Investors just need to be strategic about what they select for their portfolios.
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What Bond Investors Should Do Now originally appeared on usnews.com
