A major reversal amid the U.S. Treasury selloff! Bond market veteran Bianco turns bullish for the first time in six years, calling 5% yields a "value buy."

Title context: A major reversal amid the U.S. Treasury selloff! Bond market veteran Bianco turns bullish for the first time in six years, calling 5% yields a "value buy." Text: On Wall Street, few people choose to turn bullish at the darkest moment for the bond market. But Jim Bianco did. This macro strategist, with more than four decades of industry experience and stints at First Boston and UBS Group AG, now heads Chicago-based Bianco Research. Since the 10-year U.S. Treasury yield hit a record low of 0.3% at the darkest point of the pandemic in 2020, he has been one of the bond market's most steadfast bears. Yet now, as the benchmark yield surges to near two-decade highs, he has for the first time unclenched his bearish fist and shifted to a "value buy" stance, gradually building long positions. "This is a value trade. If yields keep rising, I'll keep buying," Bianco said. The reason Bianco's shift is so notable is that he was once one of the bond market's harshest critics. His analysis published on Substack shows that, as of this summer, the total return on U.S. long-term Treasuries had fallen to -1.85%, the worst performance since 1803. In the 223-year history since 1793, there were only 25 months in total when long-term Treasury total returns were negative, and 24 of those occurred in the current cyclethe only exception was December 1959, when the return was -0.08%. Also alarming to the market is the nearly two-year "standoff" between the Treasury market and the Federal Reserve. Since the Fed began its rate-cutting cycle in September 2024, the 10-year Treasury yield has instead climbed 98 basis points. Bianco noted that since 1971, there have been only two instances in which the 10-year yield rose during a Fed rate-cutting cycle: the 1980 episode lasted only 119 days, while this one has already persisted for nearly two years. "Over the past two years, the market has been shouting at the Fed: 'Wrong policy, wrong policy!'" Bianco said. Multiple forces are reshaping the bond market's pricing logic The drivers of this Treasury selloff are complex and far from being explained by any single factor. Inflation stickiness is the first source of pressure. The University of Michigan consumer sentiment survey showed that the one-year inflation expectation jumped to 4.6% in September, up from 4% in August and the highest reading since June. At the same time, Middle East tensions pushed oil prices above $100 per barrel, further reinforcing the market's inflation concerns. Fiscal deficits and supply shocks are the second source of pressure. Total U.S. federal government debt has approached $40 trillion, and the federal budget deficit totaled as much as $1.8 trillion in the first 10 months of fiscal 2026. Heavy Treasury issuance and corporate bond supply driven by AI infrastructure buildout are compounding each otheraccording to Vanguard estimates, Alphabet Inc. Class C (GOOGL.US), Amazon.com, Inc. (AMZN.US), Meta (META.US), Microsoft Corporation (MSFT.US), and Oracle Corporation (ORCL.US) had issued about $132 billion of debt through July, far exceeding the annual average of about $35 billion between 2020 and 2024. Broader AI-related bond issuance this year could reach $300 billion to $570 billion. The structural weakening of overseas demand is the third source of pressure. For example, Japan, as the largest overseas holder, recently reduced its Treasury holdings to support the yen exchange rate. Rising overseas interest rates are eroding a key source of demand for Treasuries. With these forces converging, the 10-year Treasury yield surged to 5.27% this week, the highest level since 2007. The 30-year yield broke above 5.5%, the highest since 2004. "Bond vigilantes" in the market have already been pressuring policymakers through sustained selling of long-end Treasuries, demanding a return to fiscal discipline. The bullish case Although this selloff may have room to run further, Bianco said yields above 5% across most maturities are making the risk-reward ratio for holding bonds increasingly attractive. A key part of Bianco's bullish case lies in a fundamental shift in the Fed's policy direction. Warsh was sworn in as Fed Chair on May 22 of this year, succeeding Powell. The new chair has taken a clear stance on inflationwhen asked about the Fed's attitude toward inflation, he gave a two-word answer: "Zero tolerance." This month, the FOMC raised the benchmark rate by 0.25 percentage points from 3.50%-3.75% to 3.75%-4.00%, the first hike since July 2023. The interest rate swap market shows traders have priced in nearly four 25-basis-point hikes over the next 12 months, which would push the policy rate to about 5%. Bianco sees this as a key turning point. He believes that only when the Fed begins to take inflation seriously and starts a hiking cycle can long-end yields truly peak. This judgment is based on historical observations of bond market behavior: the market's continued push higher in long-end yields is essentially a "vote of no confidence" against the Fed's previously overly accommodative policy. In Bianco's view, the core appeal of the current bond market is not a directional call, but the markedly asymmetric return structure. Compiled data show that investors buying 10-year Treasuries at current levels would need to see yields rise to about 6% over the next year for price losses to fully offset coupon income. In other words, yields would need to rise another roughly 75 basis points before investors could face a net loss. The return distribution is similarly skewed: every one-percentage-point decline in yields would generate a return of about 13%; conversely, every one-percentage-point rise in yields would cause a loss of less than 2%. This asymmetry between return and risk constitutes what Bianco calls a "thick cushion." He particularly emphasized that market sentiment is already extremely bearish"everyone is absurdly bearish on the bond market"and such extreme sentiment itself often means that too much pessimism is already priced in. From a longer-term historical perspective, Bianco believes the current yield level reflects more of a return to historical norms than a signal of economic distress. He pointed out that since the 1981 peak, the average 10-year Treasury yield has been about 5.3%, roughly in line with current levels. "We are returning to normal," he said. "The zero rates of 2010 to 2020 were the absurd outlier." Bianco's analysis based on an R-squared regression model further supports this judgment. The R-squared between bond yields and investment returns has been as high as 0.85 since 1914, the year after the Fed was founded, meaning the current yield level above 5% has 85% explanatory power for predicting annualized returns of about 5% over the next decade. In the current environment, Bianco believes the opportunity lies in gradually increasing exposure rather than making aggressive bets. His view is reflected in the $100 million WisdomTree Bianco Total Return Fund, which tracks an actively managed bond index he launched in 2023. Since December 2023, the index has delivered an annualized return of 2.6%, while the Bloomberg benchmark index gained 2.32%. The WisdomTree ETF has an expense ratio of 0.6% and a return of about 2.1%. It is worth noting that Bianco has raised the duration of the index he manages to more than 6 years from its previous level, above the 5.7-year duration of the Bloomberg Aggregate Bond Index. The extension of duration means he is increasing his bet on the direction of lower ratesa substantive signal of shifting from "wait-and-see" to "positioning." "I'm dipping my toe in," Bianco said. This phrasing is highly consistent with his analytical framework: he is not calling on investors to go all-in long, but emphasizing gradually increasing exposure at high yield levels, trading time for coupon income and a margin of safety.