The Bond Pivot: Jim Bianco on Why it’s Time to Start Buying Bonds

Jim Bianco is shifting from a bearish stance on U.S. bonds after five to six years, arguing they are now fairly valued rather than expensive, though not cheap. He would begin buying at yields in the mid-5% range, add in the high-5s, and buy more at 6%, absent a dramatic change in the economy. Those yields, he says, better compensate investors for risk than the 4% or low-4% yields of a few months earlier, when bonds offered less income despite a strong economy and persistent inflation. He is not predicting an immediate rally or relying on a downturn to make bonds attractive.

Bianco contrasts today’s bond risk-reward profile with 2020, when average yields were about 2% and modified duration was 7; he now puts both figures at roughly 5.5. In his comparison, yields would need to rise about one percentage point today to cause a duration-related loss comparable to the loss from a roughly 30-basis-point rise in 2020. From a 5.25% yield, a move to 5.50% or 5.75% would represent a comparatively limited loss. He says yields have been tracking fair value higher alongside nominal GDP, while inflation remains difficult to reduce and around 3%.

He describes the U.S. economy as strong, pointing to crude-oil demand above 20 million barrels a day, near a record despite high energy prices. Bianco links the end of steadily cheaper goods to deglobalization, tariffs, supply-chain problems, and two wars; after China joined the WTO in December 2001, goods inflation averaged about minus 0.5% annually for 18 years. He says the recent rise in yields had not been disorderly as of the recording, though that could change. Bond investors, he argues, worry that the Fed is not taking inflation, growth, and the deficit seriously enough, and that inflation will erode the purchasing power of fixed payments. In the rate-cut cycle that began in September 2024, the federal funds rate fell 1.75 percentage points while the 10-year Treasury yield rose 1.3 points, a pattern he called the first of its kind in more than 50 years.

Fed credibility is central to Bianco’s outlook: if investors conclude that policymakers are allowing inflation to persist, they could abandon bonds and push yields higher; more forceful action could help calm the market. He favors dropping forward guidance because investors may treat Fed signals as promises, limiting policymakers’ ability to respond when conditions change. He said the next rate decision would depend partly on payrolls, CPI, third-quarter earnings, and oil prices, and warned that perceived political influence could damage the Fed’s independence. Wilfrid Frost questioned why long-term yields had risen so quickly without a recent surge in growth or inflation expectations.

Bianco’s first step back into bonds was buying long-term TIPS as a hedge: he expects them to outperform nominal Treasuries if yields rise, while nominal bonds would do better if yields fall. He also sees rising European and Japanese yields as a potential source of upward pressure on U.S. yields. Japan has reached 2% inflation and yields above 3%, their highest in 30 years; with U.S. yields around 5%, the narrowing spread could lead some Japanese investors to consider bringing money home, while weighing currency risk. A recession or other unforeseen shock could instead prompt a flight to safety, lifting bond prices and lowering yields.

He still sees a role for bonds in portfolios because of their income, even though he says their traditional function as a hedge against stock-market moves has broken down. Investors might hold 30% or 40% in bonds for income rather than stock protection. Assuming inflation stays around 3%, Bianco expects roughly 4% annual returns on cash, 5% on bonds, and 6% on stocks over several years. He stresses that an appropriate allocation depends on an investor’s time horizon and risk tolerance; a recovery can take very different lengths of time, as illustrated by the 13 years it took the market to regain its 2000 peak versus the months-long recovery after 2020. His largest current concern is energy: shortages of products made from crude oil and refinery fires could keep pump prices high even if crude flows resume, including through an open Strait of Hormuz.