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

Wall 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

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.

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.