By Amey Stone

The yield curve, a line graph showing the yields of bonds short- to long-term, got a lot steeper last Friday after a weak jobs report showed the economy is cooling. President Donald Trump's firing of the head of the Bureau of Labor Statistics, a surprise move that suggested trust in economic data could be easily upended, didn't help matters.

"We're now looking at slightly slower growth, higher inflation, and a weaker labor market," says Roger Hallam, global head of rates at Vanguard. The benchmark 10-year Treasury yield dropped to 4.25% from 4.4% and has essentially stayed there. Hallam believes it could trade as low as 4% this year, when he had thought it would stay in a range as high as 4.75%. "When facts change, we change our minds," he says.

The two-year Treasury yield fell to 3.71% from 3.96% last Friday and has also remained near that low level. Federal Reserve Chair Jerome Powell will likely point to a September interest rate cut at the Jackson Hole economic conference later this month, says Michael Arone, chief investment strategist at State Street Investment Management. Short rates have priced in these moves, but would likely fall further if economic data continues to weaken and odds for a second rate cut this year increase, he says.

With rates coming down as the yield curve steepens, extending maturities makes sense -- but not too far, say strategists. Many recommend bonds maturing in five to seven years. In Treasuries, that's where you get most of the yield but avoid the volatility of longer-term bonds. "Investors aren't really being compensated for lengthening duration too much," Arone says. His firm's SPDR Portfolio Intermediate Term Treasury exchange-traded fund yields 4%.

Arone expects long rates to stay volatile due to increasing U.S. debt levels, shifts in global trade, and new questions about the sanctity of U.S. government economic data. These factors all increase the amount investors need to be compensated for the risk of buying long-term U.S. debt.

For added yield without going long, Arone likes core bond funds that can diversify beyond traditional bonds. For example, this year State Street and private-equity firm Apollo Global Management launched the SPDR SSGA IG Public & Private Credit ETF. Its private-credit "kicker" adds yield and helps with interest rate risk since private loans are mostly floating-rate. It yields 4.4%.

JoAnne Bianco, senior investment strategist at asset manager Bond Bloxx, highlights her firm's BondBloxx Private Credit CLO ETF. It gives investors exposure to loans made to private companies, mainly by buying collateralized-loan obligations, or CLOs, and yields in the 8% range. She also likes the BondBloxx BBB Rated 1-5 Yr Corp Bond ETF, which invests in triple-B-rated corporate bonds, a lower investment-grade rating. "You get an elevated yield in the 5% range, but much less volatility because it is so short-term," she says.

Municipal bonds are attractive for investors concerned about taxes, says Bill Merz, head of capital markets research and portfolio construction at U.S. Bank Asset Management Group. With munis, as opposed to Treasuries, investors can go longer in maturity and lower in credit quality for extra yield. "It's a nice opportunity for highly taxed individuals to lock in compelling yield without significant risk," he says. Another option: Nonagency residential mortgage backed securities, which offer more yield than Treasuries without much more risk.

For Vanguard's Hallam, the bottom line is that bonds offer attractive after-inflation returns, even if yields have fallen recently. He notes that 10-year Treasury inflation-protected securities (TIPS) yield 1.9% over the rate of inflation today, compared with an average of 0.59% for the past 10 years.

What about cash? The 4% yield on many money-market funds is competitive with intermediate investment-grade bonds, but yields are likely to fall further, "Over the long term, returns are better in longer-term bonds," Hallam says. "Cash is not a good long-term strategic allocation."

Write to Amey Stone at amey.stone@barrons.com

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August 08, 2025 21:30 ET (01:30 GMT)

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