At their core, fixed-income investors tend to be a conservative group of investors. The appeal of bonds lies in the steady coupon payments and repayment of principal at maturity. And given this conservative nature, it’s easy to see why quality bonds or investment-grade fixed-income assets, such as Treasury securities, make up the majority of their holdings. But lately, the treasury market has been on a wild ride.
Growing volatility and rising uncertainty have added new risks to quality bond sectors. Yields are all over the place, and prices have changed on a dime.
However, according to wealth manager UBS, quality bonds are still highly desirable. Offering steady income, diversification benefits, and better long-term returns than other safe-haven assets, quality bonds are still a great choice for the core of a fixed income portfolio.
Growing Volatility
Treasuries aren’t supposed to bounce around. The IOUs issued by Uncle Sam are supposed to be the bedrock of the bond market, offering a calm port in a storm when things get dicey. But lately, that hasn’t been the case. The yield on the benchmark 10-year has been all over the place.
During the last months of 2024, the Federal Reserve managed to lower benchmark rates by a full 1%. That should have dropped the yield on the 10-year and raised bond prices. However, the yield on the 10-year rose, growing from 3.65% in September 2024 to 4.61% at the start of 2025. Since then, it’s been a rollercoaster, rising and falling more than a full basis point over the last few weeks.
This chart sums up the 10-year bounciness over the last year.
Source: CNBC
The reasons for the current bounciness of the ten-year are vast. But it can be summed up in one word- uncertainty.
New fiscal and geopolitical woes have now entered the picture. The Trump Administration’s plans are causing plenty of uncertainty for the broader bond market. The pending tariffs have increased the risk of a recession, which should make high-quality bonds attractive. But tax changes and spending plans are expected to cause the budget deficit to rise even further above current levels. That has many bond investors questioning the safety and appeal of high-quality bonds, demanding higher yields to overcome potential risks.
And with that, quality bonds and the Treasury market have become a minefield of volatility.
Value Still Left in Quality Bonds
Nonetheless, investors may not want to give up on quality bonds. Wealth manager UBS thinks Treasuries and other investment-grade bonds are attractive in this environment, and cites several factors as to why they make sense for portfolios. 12
For one thing, starting yields are a good indicator of long-term returns. According to UBS, even with the volatility, the yield on the 10-year is still at highs not seen since 2008. That’s important, as studies show that starting yields explain more than 90% of the expected future return with regard to bonds.
The yield and potential return for Treasuries are also attractive when compared to cash. UBS believes that the Fed’s rate-cutting cycle still has more room to run, particularly if a recession takes hold. That would make cash a losing asset class as the uber-short duration of cash and cash-like holdings feels the effects of rate decreases first. Data shows that the probability of bonds outperforming cash rises with longer holding periods, growing from 65% over 12 months to 82%, 85%, and 90% over five, 10, and 20 years, respectively.
With the still-high starting yields, investors are able to lock in higher income for the long haul while cash quickly becomes a losing asset. That locked-in income also helps stabilize a portfolio and allows bonds to produce real diversification again. UBS cites historical data going back to 1900 that a diversified 60/40 stock/bond portfolio would have an annualized real return of 5.1%, with lower volatility.
There is another factor to consider that is not a function of the market, and that’s government action. UBS highlights that a functioning and healthy Treasury market is vital not only to the American economy but also to the world’s. Several Federal Reserve Governors, including Christopher Waller and Susan Collins, mentioned in recent comments that the central bank would do what is necessary to stabilize the financial markets. This echoed comments from Treasury Secretary Scott Bessent, who would “address dislocations in the bond market if needed.” Even President Trump and his team have added 90-day holds on many tariffs and have initiated constructive talks with several nations, including China.
To UBS, this government intervention and potential backstops reduce some of the risk that investors may be placing on the Treasury market. As such, the sector’s current high yields may not be reflective of what’s truly going on.
Quality Bonds are a Go
With their high starting yields and other factors in play, investors may not want to jettison their quality bonds just yet. And, according to UBS, they may want to add more Treasuries to their portfolios as they could offer real compelling value.
The best part is that treasury bonds are some of the easiest asset classes to own. You can buy them directly from the government or through a reputable brokerage firm.
Getting exposure through exchange-traded funds (ETFs) is also easy. There are numerous Treasury ETFs on the market. Nearly all of them are passive as there isn’t much active management can do within the sector to boost their returns. So-called core-plus funds adjust the mix of bonds, overweighting mortgage-backed securities (MBS) and corporate bonds. While also considering quality bonds, the crux of UBS’s argument is the Treasury market.
Intermediate Treasury Bond ETFs
These funds are selected based on exposure to intermediate Treasury bonds and the 10-year Treasury note. They are sorted by their YTD total return, which ranges from 3.4% to 3.9%. Their expense ratio ranges from 0.03% to 0.15% and they have AUM between $162M and $40B. They are currently yielding between 3.5% and 4.5%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| IEF | iShares 7-10 Year Treasury Bond ETF | $33.1B | 3.9% | 3.8% | 0.15% | ETF | No |
| UTEN | US Treasury 10 Year Note ETF | $162M | 3.8% | 4.5% | 0.15% | ETF | No |
| SPTI | SPDR Portfolio Intermediate Term Treasury ETF | $7.5B | 3.7% | 3.9% | 0.03% | ETF | No |
| VGIT | Vanguard Intermediate-Term Treasury ETF | $39.6B | 3.6% | 4% | 0.03% | ETF | No |
| SCHR | Schwab Intermediate-Term U.S. Treasury ETF | $10.4B | 3.5% | 3.7% | 0.03% | ETF | No |
| IEI | iShares 3-7 Year Treasury Bond ETF | $15.8B | 3.4% | 3.5% | 0.15% | ETF | No |
Treasury bonds haven’t been living up to their steady nature in recent weeks, with surging volatility and yields that have been bouncing around. However, investors may want to ignore the short-term noise and continue to focus on these quality bonds. According to UBS, they still offer plenty of rewards, and the risks may be blown out of proportion.
Bottom Line
The ten-year yield has been all over the place as new risks have entered investors’ minds. Nonetheless, Treasuries and high-quality bonds still offer steady income and a chance for great long-term returns. Investors may want to ignore the noise and continue to add/hold these bonds.
1 UBS (February 2025). Quality bonds can help stabilize portfolios
2 UBS (April 2025). Why quality bonds remain attractive
