We're Big Buyers of the 10-Year at 5%, BMO's Davis Says

Global fixed income markets are entering a period of significant structural change characterized by steepening yield curves, a phenomenon led by Japan and now impacting the United States. Earl Davis, Head of Fixed Income at BMO Global Asset Management, argues that 30-year Treasury yields are likely to hit 6% before 10-year yields reach 5% due to heightened long-duration mark-to-market risk. While the 10-year note remains attractive at the 5% level—potentially triggering Federal Reserve intervention—the 30-year bond presents excessive risk given its 20-year duration. Despite anticipated turbulence, steepening curves benefit the economy by improving bank profitability and lending capacity. Current investment strategies involve rotating out of U.S. high-yield debt into investment-grade securities within the two-to-three-year bucket to maintain liquidity. This positioning allows for future opportunistic buying in financials, aerospace, defense, and energy sectors when market volatility causes credit spreads to widen.