Bond yields at multi-year highs: How you can profit

A major drama is unfolding in the global government bond market, typically considered a "gray" market far from the excitement of the stock market. Recently, however, it has been stealing the spotlight, as yields on long-term government bonds in the US, Europe, and even Japan are at peaks not seen for decades.

The situation reached a boiling point until this Wednesday, when the US Treasury announced a plan to stabilize the markets. It announced at least a doubling of its bond buyback operations to $4 billion for 10- to 30-year bonds, citing a "desire to provide greater liquidity support." The immediate reaction from investors was positive, as long-term yields plunged sharply.

Why is this happening?

In the US, 30-year bond yields recently hit a peak not seen since 2007, on the eve of the subprime crisis, and are trading at about 5.2%. Investors are concerned about persistent inflation, high government spending, and a national debt heading toward the $40 trillion threshold, alongside rising chances of interest rate hikes.

Additionally, the "Nvidia effect"—where corporate debt issuance by tech giants is breaking records—is flooding the market with tradable debt.

In Europe, budget deficits are deepening. In France, the political crisis remains unresolved, and an additional budget is expected to pass by presidential decree. With national debt exceeding 115% of GDP, long-term bond yields are approaching the 5% threshold—a level not seen in 18 years.

Italy and the UK also saw a nearly 20-basis-point rise in 10-year bond yields in the last week alone. In the UK, 30-year yields are nearing 5.8%. This reflects not only global fears of a debt crisis but also European dependence on fuel prices, inflation concerns, and the need to finance security expenses.

Is this an investment opportunity?

Locking in an annual yield of about 5% for the long term seems enticing. However, variables remain: high yields are nominal and reflect fears of "sticky" inflation, which could erode real returns.

For local investors, currency risk due to dollar-shekel volatility, trading costs, and management fees must be factored in. Even without currency risk, Bank of America strategists recommend an "everything but bonds" approach, noting that US debt could reach $50 trillion by 2029.

Why are bond investors in Israel relatively calm?

In Israel, 10-year bond yields stand at about 3.8%, and 30-year yields at about 4.4%, far from the peaks of over 5% recorded in mid-2024. Ronen Menachem, chief market economist at Mizrahi Tefahot, attributes this to exceptional economic circumstances: inflation in Israel is significantly lower than in the US (around 2% vs. 4.5%), and the deficit in the first half of the year was relatively low at 3.3% of GDP.

"There are no free lunches," Menachem warns. If the geopolitical situation deteriorates and the government significantly increases spending, the road to rising yields will be short.

How should one be exposed to bonds?

Saar Weintraub of Altshuler Shaham believes that at current levels, government bonds are becoming a significant alternative or at least an attractive complement to stock exposure. Asaf Halaby of Ayalon Insurance and Finance notes that today, one can create better geographical and sectoral diversification in tradable debt without compromising the portfolio's internal yield.