Goldman Sachs: Bonds are shifting from a safe haven to an income-generating tool; caution is needed against heightened volatility when bottom-fishing in long-duration bonds.

This week, the average yield on global government debt climbed to a 19-year high. Goldman Sachs strategists including Christian Mueller-Glissmann wrote in a report that while the past five years have been one of the worst periods for bonds in a century, the sharp rise in yields is enhancing their appeal. The strategists also said that although the bond selloff strengthens the case for holding bonds in multi-asset portfolios, investors should remain cautious on bonds. "We see a case for a return to a more 'normal' strategic bond allocation, but the case for tactically adding to long-duration bonds is mixed," they wrote. Goldman said higher starting yields provide a buffer against further increases and should, over longer horizons, push optimal bond allocations back toward historical norms. However, Goldman believes that in the near term, energy shocks and the interest rate outlook may remain key drivers for both stocks and bonds, meaning a higher bond allocation could increase portfolio volatility rather than serve as a defensive buffer. The bank remains overweight equities, neutral bonds and underweight credit in its 12-month asset allocation. "We think bonds are increasingly becoming an income-generating tool with less risk-mitigation power, similar to the 100 years before the late 1990s," Mueller-Glissmann and colleagues said. It is worth noting that Goldman's cautious stance is not the market consensus. The selloff has begun to attract some large investors. Bob Michele, chief investment officer at JPMorgan Asset Management, said on Wednesday that his team has started buying long-dated government bonds in the US, Japan and Australia, arguing that current prices are "just too cheap" and that the bond market has reached a "point of extreme pain." Michele pointed out that multiple bullish factors are converging: from the European Central Bank's rate hike last week, through the Federal Reserve, to the Bank of Japan's policy action this Friday, a series of central bank moves will constitute important support for the bond market. Meanwhile, as the US midterm elections approach, the situation in the Middle East is expected to stabilize, and geopolitical risks may gradually cool. US Treasury Secretary Scott Bessent's buyback program for long-term government bonds was launched last month, which Michele sees as a key force for stabilizing the market, noting that Bessent "still has plenty of ammunition to step up if he wants to." Michele believes the selloff at the long end of the yield curve has been severely overshot. He noted that the rapid surge in long-end yields "highlights market concerns about the Fed's current loss of control," and that this rate hike helps Fed policymakers "reassert control over the situation." In his view, "the dominoes have started to fall," and the policy chain from the European Central Bank to the Federal Reserve to the Bank of Japan will form a complete logical chain supporting the bond market.