The case for buying the long bond—and what to know before you do

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Two strategists who have long shunned government bonds are making the case to buy long bonds.
Since 2022, Gavekal Research co-founder Anatole Kaletsky has recommended investors avoid sovereign debt from the seven major advanced economies. In a note on Tuesday, he was championing 10- and 30-year U.S. government bonds. Founder of Bianco Research, Jim Bianco, also turned around on long-duration U.S. government debt for the first time in six years last week.
Optimism is beginning to emerge in the bond market even as long-duration Treasuries get hammered.
The $47 billion iShares 20+ Year Treasury Bond exchange-traded fund has dropped for 10 straight days—its longest ever losing streak. But investors hoping for a reversal are pouring in money; as of Monday, the fund recorded $5.3 billion in inflows this year, an about-face from negative cumulative year to date flows seen until Aug. 11.
Consensus in the market is that Federal Reserve will lift the benchmark fed-funds rate—currently at a target range of 3.75% to 4%—to at most 4.75% by the end of 2027, and rising rates hurt bonds. So why are the bond bulls coming out of the woodwork?
Some like Kaletsky expect lower interest rates in the near future, which can bring down yields. When yields drop, bond prices rise.
Consider the forecast published last month by the Federal Open Market Committee—the group that sets the target range for rates. It showed a majority of members expect interest rates below 4.25% in 2027.
The Fed-funds rate has the biggest effect on short-term bonds, but it has shown a surprisingly strong link to long-term yields as well. Over the past three months, daily moves in the 10-year Treasury yield and future expectations of the Fed-funds rate a year out have had a 0.77 correlation. The closer the reading is to 1, the stronger the correlation.
The stronger correlation could be because hedge funds and other private investors have become a bigger player in the Treasury market over the past decade. More folks worried about making profits now means bond prices are more sensitive to Fed speeches and short-terms events.
Kaletsky sees a bigger reason for a move lower in interest rates—and it isn’t one cited by other bond mavens: the widening U.S. budget deficit.
Lower rates are coming, in part “because the Fed, like every other central bank, is ultimately an agency of the government” and will “protect the solvency of the government and the banking system” even over other goals like containing inflation or full employment, he writes.
The Fed lowering rates to ensure the U.S. government can afford its debt bill would detonate the market’s belief in the central bank’s independence. And that would likely raise yields not lower them, causing more bond market losses. Investors should be wary about betting on a political Fed.
Meanwhile, Bianco likes long bonds because of the outright yields in the market. “It is paying me to own those bonds,” he said in a Bloomberg podcast published Oct. 1.
The 10-year settled at 5.31% on Monday while the 30-year yield rose to 5.66%, both at their highest close since 2002. Treasuries are expected to pay these fixed interests twice a year and return full principal at maturity.
Long Treasuries could also be a good bet if stocks tanks and the economy weakens, which usually lowers yields as Barron’s highlighted last week.
“You get squeamish that something bigger is going on because there’s always that fear in the bond market that yields rise till something breaks,” Bianco said. But “I don’t think that that is a concern right now. I hope I’m not proven wrong on that.”
Reasons for yields to rise are plenty. In addition to the soaring U.S. debt, there’s a war to pay for, stubborn inflation around 3%, and competition from corporate borrowing to finance the massive artificial-intelligence buildout.
Rising diesel and gasoline prices are another worry. “It’s an understatement to note that oil is a wild card for the US rates market at the moment,” writes BMO Capital Markets strategist Ian Lyngen.
Finally, bond yields have also been on the march in many European countries with their own debt crises.
There are tons of risks if you buy a 20- or 30-year U.S. Treasury. But if you are a longer term investor—not a hedge fund or a algorithmic trader—and don’t mind digesting short-term volatility for a big payout over a decade or three, it’s a compelling time to buy them.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.

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