5 ETFs To Watch As 10-Year Treasury Approaches 5% Yield, Analysts Say It's Now A 'Buy'

The yields on 10-year Treasury bonds surged to 4.98% in early morning trading on Thursday, reaching their highest level since mid-July 2007.

As yields approached the significant 5% milestone, Wall Street reacted. In a note shared on Thursday, Vishal Khanduja, managing director and portfolio manager at Morgan Stanley Investment Management, expressed the view that a 5% yield on 10-year US Treasuries presents an attractive buying opportunity for investors. According to Khanduja, it’s an excellent chance to extend the duration of a portfolio.

Goldman Sachs analysts, including Arun Prakash, CFA, and John Marshall, believe that 10-year Treasuries have underperformed their usual relationship with macro assets and expect them to revert to the mean in the coming months. They anticipate that yields on 10-year Treasuries could decrease to around 4.2%-4.3%, indicating that call options on the iShares 7-10 Year Treasury ETF IEF may present an appealing opportunity for investors to protect against the risk of lower yields.

Chart: Treasury Yields Rose To The Highest Level In More Than 17 Years

Bond ETFs Tracking 10-Year Treasury

The 10-year Treasury bond is closely monitored by several exchange-traded funds (ETFs), including:

• US Treasury 10 Year Note ETF UTEN
• iShares 7-10 Year Treasury Bond ETF
• BondBloxx Bloomberg Ten Year Target Duration US Treasury ETF XTEN

There are also leveraged ETFs aiming to amplify the returns of the underlying 10-year Treasury bonds, including:

• Direxion Daily 10-YR Treasury Bull 3X Shrs TYD
• Direxion Daily 10-YR Treasury Bear 3X Shrs TYO

Gold Vs. Treasuries

Otavio Costa, partner and portfolio manager at Crescat Capital, offered a different perspective by comparing the price of gold to that of Treasuries.

Hard assets, such as precious metals, have historically delivered strong performances, even in the face of rising interest rates, he says. This challenges the notion that higher Treasury yields reduce the appeal of holding an asset that doesn’t generate any yield.

One must take note of today's strength in precious metals as Treasuries sell off significantly.

A popular argument against the idea of investing in hard assets in a rising interest rate environment is the notion that it might not be appealing to hold an asset that doesn't… pic.twitter.com/lQwq5twvij

— Otavio (Tavi) Costa (@TaviCosta) October 17, 2023

Read Also: 30-Year Yields Rise Above 5% As Biden Announces ‘Unprecedented’ Congress Support For Israel

In early August, billionaire hedge fund investor Bill Ackman made headlines when he announced a substantial short position in 30-year Treasuries. He did this initially as a hedge against the impact of higher long-term rates on stocks and also because he believed it was a high-probability standalone bet. Since making that statement, the long bond has declined by 12%, making Ackman’s bet a profitable one as of now.

I have been surprised how low US long-term rates have remained in light of structural changes that are likely to lead to higher levels of long-term inflation including de-globalization, higher defense costs, the energy transition, growing entitlements, and the greater bargaining…

— Bill Ackman (@BillAckman) August 3, 2023

Earlier this week, the popular economist Mohamed El-Erian highlighted the progressive erosion of the U.S. Treasury market as the world’s preferred risk-free asset.

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