After a bad year for bonds, investors lose faith in a turnaround

All Street investors entered each of the past two years brimming with optimism about U.S. Treasurys and other types of high-quality debt. Each time, they were disappointed.

- Sam Goldfarb

Now, they are far more guarded. In recent weeks, money managers have been dumping Treasurys, while savers have been rushing out of longer-term bond funds.

All that selling has pushed Treasury yields to the upper end of their two-year range. Still, investors remain worried that a tough environment for bonds could get even worse if President-elect Donald Trump pursues inflationary policies such as new tariffs. Many are debating whether hiding out in short-term T-bills could again be the smarter play.

"Cash is yielding 4-plus percent," said Ed Al-Hussainy, global interest-rate strategist at Columbia Threadneedle Investments. "That's a pretty tough bogey to beat."

Such doubts represent a big shift on Wall Street.

Just a few years ago, bonds were enjoying a decadeslong bull run and investors hardly feared higher rates. They generally assumed rates couldn't rise much above zero without triggering a recession.

When the Federal Reserve raised rates aggressively in 2022, most investors still believed it was only a passing phase. Through 2023, they consistently bet on a quicker and sharper turn to lower rates than the Fed itself was forecasting.

Now, though, more investors have come to believe that the economy can handle higher rates and that inflation will persist as a threat.