As the Bond Market Shudders, Wealth Management CIOs See Opportunity

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Recent weeks have brought tumult to the bond market.

Both 10-year and 30-year Treasury rates are at their highest levels in two decades. Similar spikes have occurred on other sovereign debt. Meanwhile, amid elevated inflation, the Federal Reserve raised the target for the federal funds rate by 25 basis points at its last meeting, and the market is pricing in one more rise by the end of 2026 and potentially a few more in 2027.

While borrowers may be feeling consternation at spiking rates (including homebuyers facing average rates near 7.5% on 30-year mortgages), this is generating fertile opportunities for fixed-income allocations. Higher yields mean investors don’t have to take on as much credit or duration risk to achieve attractive returns outpacing inflation. In general, elevated yields provide meaningful income generation and a cushion against price volatility compared to the low-rate environment before inflation spiked globally.

A Measured Shift

Chief investment officers at wealth management firms see opportunities across the market, including Treasuries, municipal bonds, high-yield corporate bonds, private credit and TIPS (Treasury Inflation-Protected Securities). In addition, many are bullish on active management within their fixed-income allocations to generate alpha.

“We have tilted toward quality, trimmed exposure where spreads don’t justify the risk, and kept some dry powder to add if the setup improves,” said Jeff Neumeyer, principal partner and chief investment officer at Open Arc Corporate Advisory, a former Merrill Lynch breakaway that manages more than $10.5 billion in assets.

“We’ve been underweight duration in most client portfolios for several years, and we’re now gradually moving closer to a neutral duration stance as we assess where rates settle,” added Matthew Liebman, founding partner and CEO of Amplius Wealth Advisors, a Blue Bell, Pa.-based RIA with $1.7 billion in AUM. “It’s a measured shift rather than a dramatic repositioning. We are not chasing the move, but we no longer see the same asymmetric case for staying as short.”

Vehicles vary. A minority of wealth firms buy debt directly; however, most employ a mix of ETFs and mutual funds, often inside of SMAs for individual clients. Some also use structured notes and private credit for clients who are comfortable with illiquid positions.

“We primarily utilize individual bond issues, though we will incorporate actively managed mutual funds and ETFs,” said Chris Osmond, CIO for Fifth Third Wealth Advisors, a Cincinnati-based RIA with an AUM of about $8 billion. “The core fixed income allocation generally includes high-quality short-to-intermediate-duration bonds and flexible multi-sector strategies that can allocate among corporate credit, securitized assets, loans and other income-oriented sectors.”

Little Reason To Go Long

When it comes to government debt, allocators are focused on the short end of the yield curve, especially with a minimal spread between two-year and 10-year Treasuries. Most also see little reason to go for long-dated Treasuries given the yields on short-dated debt, although that could change.

“I think looking for opportunities on the long end is a low-success strategy right now given the overall level of leverage in the market,” said Cyrus Amini, CIO at Hyphen Wealth Management, a Lafayette, Calif.-based RIA with $125 million in AUM. “Global yields are converging on an upward path, with massively more supply versus history. I continue to focus on the short end of the curve and floating rate debt.”

The picture varies for municipal bonds, which offer more attractive yields in the 10- to 15-year range.

“If you look at the high-grade yields, especially at the index level, you’re looking at 6% on a tax-free basis,” said Christopher Gunster, partner and the head of fixed income at Fidelis Capital, a Tampa, Fla-based RIA with about $3 billion in AUM. “If you look at the tax-equivalent yield, it’s close to 10%. You’re not going to find that in any other liquid type of investment. So, we look at that as an attractive place.”

Outside of government debt, CIOs pointed to agency-backed mortgage-backed securities, asset-backed securities, non-agency residential mortgage-backed securities, infrastructure debt and floating rate high-yield debt as attractive fixed-income allocations.

“We currently think core markets—investment grade corporates and agency MBS—and securitized markets—asset-backed securities, RMBS, and select CMBS—are most attractive, but we also think non-U.S. developed and emerging market debt are attractive opportunities for both income and diversification,” said Lawrence Gillum, chief fixed income strategist for LPL Financial.

In terms of credit risk, some allocators noted that credit quality has improved across the board, including in high-yield corporate debt.

“Our approach has been to find asset managers … that have a long track record of credit research and the ability to manage that,” said Brian Spinelli, co-CIO, Halbert Hargrove, a Long Beach, Calif.-based RIA with around $4.2 billion in AUM. “When you look at the U.S. high-yield index, underlying credit quality has improved over a decade ago. A lot of that index—more than 60%—is now BB-rated. That’s partly the reason that spreads are rather tight there versus historical standards. … You don’t see Cs and junk dominating that index at this point.”

Areas of Concern

However, there are some areas of concern, particularly for companies facing debt maturities in a lower-yield environment that will need to be refinanced at substantially higher rates. In addition, the amount of debt taken on by AI hyperscalers is a potential concern.

The “consensus has their capex outpacing operating cash flow into next year, and they are leaning heavily on bond markets to fund it,” Neumeyer said. “The market is absorbing it fine for now, but the cushion gets thinner if growth slows.”

Gary Pzegeo, managing director & CIO at CIBC Private Wealth, which manages about $121 billion in assets, said his internal strategic and asset allocation committee builds a combination of default expectations based on macroeconomic variables and weighs what the market has priced in for credit risk against those default projections.

“For now, there are good tailwinds and high potential growth in the U.S.,” Pzegeo said. “You still have significant buyers out there [for Treasuries]. There’s no market that is as liquid as the U.S. But we have also been saying it’s worthwhile to do some currency diversification and get clients exposure to other parts of the world and other currencies if there is a breakdown in the U.S. deficit outlook.”

CIOs are also still bullish on private credit, seeing some concerns as overblown and isolated to one sector of the overall market (specifically, middle-market corporate direct lending), and viewing spikes in redemptions that have hit some semiliquid private credit funds as a bump in the road.

On Fed policy, wealth CIOs pointed to market consensus forecasts that are pricing in two to three more rate hikes through early 2027. Beyond that, the picture is murkier. However, most are not anticipating hikes beyond that. That will depend, in part, on whether inflation driven by spiking oil prices eases. On the flip side, there is no expectation that the Fed will reverse course and begin aggressively lowering rates in the near future, given inflation expectations remaining around 3.0% over the long term.

As for proactively taking on inflation protection, there is some interest in TIPS, which currently offer real yields north of 2.5%. In addition, some allocators are looking to real assets and alternatives to provide income diversification and inflation protection. Overall, CIOs advocate for combining multiple inflation hedges rather than relying on TIPS alone.

“We generally look to get our inflation protection from equities and hard assets like gold (via ETFs) and real estate,” said Warren Hurt, senior vice president and CIO at Chambersburg, Pa.-based F&M Trust, which manages about $1.4 billion in assets. “We have found the accounting and shadow taxation issues in TIPS make them hard to recommend. As long as the federal government creates dollars faster than the GDP creates goods and services, inflation pressures will remain. Under those conditions, an overweight to long bonds is hard to recommend.”

“The objective is not to make an all-or-nothing inflation thesis,” added Fifth Third’s Osmond. “It is to build multiple sources of protection across the portfolio while recognizing that different inflation hedges will behave differently depending on whether inflation is being driven by demand, energy, wages, supply constraints or monetary and fiscal policy.”

The Opportunity Ahead

When communicating with clients, Halbert Hargrove’s Spinelli emphasizes that it’s crucial to assess fixed income with the opportunity ahead in mind, rather than focusing on allocations made in a lower-rate environment.

“It’s about looking forward and understanding what you have in this environment vs. what you had before inflation and rates started going up,” he said.

“What I tell clients and what I’m telling you and your readers is that when the market gives you an opportunity, take it,” added Fidelis’ Gunster. “The current environment of high interest rates is something we haven’t seen in many years. I’ve been through ZIRP and trying to convince clients I could add 5 or 6 basis points. Now, I can give tangible real yields, tangible nominal yields and total returns that look very attractive.”

Amplius’s Liebman said conversations have been relatively easy, despite the market tumult.

“Since we have stayed short duration and high quality, the rise in rates has largely been a positive for our clients’ bond portfolios rather than a source of pain,” he said. “That makes it much easier to have the conversation than if we’d been caught long duration.”