MW The most important woman in bonds says investors now have unrealistic expectations

By Barbara Kollmeyer

Franklin Templeton's Sonal Desai says to strive for boring returns

Riding out a volatile year, stock-market investors have now seen the S&P 500 SPX claw its way back to an 8% return.

What about bond investors? BlackRock recently declared the bond market is looking its best in 20 years, with yields of 4% or more from a chunk of the fixed-income market. Wells Fargo has also said that stocks look expensive versus bonds.

Our call of the day from the chief investment officer of Franklin Templeton Fixed Income, Sonal Desai, says investors might be getting too greedy when it comes to what they expect from bonds these days.

Desai, considered one of the most influential persons in the bond market managing over $215 billion in assets, spoke to Ritholtz Wealth Management's Barry Ritholtz on the exposure investors need from the fixed-income market these days.

To start, Desai said that with 10-year Treasurys BX:TMUBMUSD10Y yielding around 4.4% to 4.5% currently, and lots of liquidity from the Fed still sloshing around, those bonds are not a "screaming buy."

Calling herself "aggressively neutral," she said fair value for the 10-year yield is probably between 4.75% and 5%. "So in fact I think there's more for U.S. Treasurys to sell off," and a "massive rally" is probably unrealistic, she said. Bond yields move in the opposite direction to prices.

Desai is not in the "recession camp" yet because despite tariffs, she sees consumers continuing to spend. She doesn't think the Fed, which will announce a policy decision on Wednesday, has much room to cut interest rates.

Desai believes it's a "good time for fixed income," but wants to see more realistic investor expectations. Generations out there in the past got accustomed to getting just 1% -2.5% for investing in 10 year Treasurys, basically "paying the government for the privilege of lending it money," she said.

Fast forward and they are getting positive real returns - "a constructive environment for fixed income. But you can't expect equity-like returns from fixed income," she said. "And again, because of liquidity flows and so on, people have become a little bit married to the idea of fixed income delivering massive outperformance. And what it should really be doing is giving you boring returns."

That is, fixed income should be "the ballast" in a portfolio in an equity market that is delivering "equity-like returns," said Desai.

The CIO noted that an abundance of liquidity sometimes pushes investors into riskier products. She cautions against "getting massively over your skis in terms of adding on extra risk because things are priced to perfection in a market like this one."

While she's not forecasting a recession, a COVID-like curveball bringing a short recession with longer-term consequences can't be completely dismissed. "Given how assets are priced right now, I would not go overboard loading up on risk at current levels. There are many reasons to anticipate, for example, additional corrections including on the equity markets," she said.

Desai generally thinks investors should stick to shorter duration on bond investments, just in case the 10-year Treasury yield decides to "grind higher," as taking on too much duration will hurt investors. With that, she suggests investors even get comfortable with ultrashort duration, which generally refers to bonds maturing in one year or less. "So you could start moving out the yield curve as opportunities present themselves," she said.

Last word from Desai is that there's too little discussion about the fiscal deficit the U.S. has been running a few years now, with neither major political party seemingly willing to do anything to reduce it.

"I do think at some stage there needs to be some change in policy that reduces that deficit meaningfully. And I'm not sure you can do that without actually reducing growth. This is an additional reason why I don't think the Fed should go too far today," she said.

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are rising, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y steady, and gold (GC00) and the dollar DXY moving higher.

   Key asset performance                                                Last       5d      1m     YTD     1y 
   S&P 500                                                              6389.77    1.33%   2.98%  8.64%   16.95% 
   Nasdaq Composite                                                     21,178.58  0.97%   3.97%  9.67%   21.92% 
   10-year Treasury                                                     4.412      6.20    16.90  -16.40  27.30 
   Gold                                                                 3315.8     -2.77%  0.02%  25.63%  39.23% 
   Oil                                                                  66.66      1.34%   2.60%  -7.25%  -12.20% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

UnitedHealth shares (UNH) are falling after the health insurer's profit and reinstated full-year outlook both disappointed. Still to come are results from Boeing (BA), Procter & Gamble $(PG)$ and others. Starbucks (SBUX) and Visa (V) will report after the close.

Whirlpool shares $(WHR.UK)$ are dropping 14% after the appliances maker's profit dwindled on stiffer tariff-driven competition.

The Fed's two-day policy meeting kicks off on Tuesday.

The U.S. trade balance is coming at 8:30 a.m., followed by the S&P Case-Shiller home prime index at 9 a.m., then consumer confidence and job openings at 10 a.m.

There's also an auction of $30 billion of 2-year floating rate notes as well as a $44 billion auction of 7-year notes.

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The chart

"The plight of international equities for the last twenty years is well-known to most investors, but in the last month or so, we've finally seen them break out to new all-time highs above two key resistance levels," says Bespoke Investment Group of their chart showing the MSCI All World ex US index ACWX, which tracks international equities. Since the end of 1987, the U.S. has beaten international by around 9 times, and the S&P 500 is up nearly 2,500% versus 288% for MSCI World ex U.S. Is this the start of a new era for international? Watch this space.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   AMD     Advanced Micro Devices 
   GME     GameStop 
   PLUS    EPlus 
   PLTR    Palantir Technologies 
   SMCI    Super Micro Computer 
   UNH     UnitedHealth 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 

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-Barbara Kollmeyer

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July 29, 2025 06:43 ET (10:43 GMT)

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