With the intensification of interest rate fluctuations, what are the investment opportunities in the bond market?

   Against the backdrop of the interweaving of the Fed's policy uncertainty and inflationary pressure, the US bond market is experiencing the most violent volatility cycle in recent years. In June 2025, the 10-year US Treasury yield broke through 4.4%, and the 30-year yield was close to 5%, the highest since 2007.

This volatility brings both risks and structural opportunities. For investors, the key is to accurately grasp the allocation strategy in the fluctuations of interest rates.

1. The driving logic of interest rate fluctuations

The core contradiction of the current market volatility lies in the game between inflation stickiness and policy expectations. In May, the US super core inflation rate soared to 5.0% year-on-year, a new high since April 2023, and although the core CPI fell to 3.4%, the record of being above 3% for 38 consecutive months still puts the Fed in a dilemma.

Morgan Stanley predicts that interest rates may be cut by 25 basis points in June, but institutions such as CITIC Securities believe that the number of interest rate cuts this year may be less than 2 times, and the uncertainty of the policy path has led to frequent revisions of market expectations.

In addition, fiscal risks exacerbate market turmoil. The size of the U.S. national debt has exceeded 36 trillion U.S. dollars, and the debt due in June has reached 6.5 trillion U.S. dollars. Congress has not yet reached an agreement on the debt ceiling. 

The CDS spread has climbed to a two-year high, reflecting investors' concerns about sovereign credit. BlackRock pointed out that the expansion of the federal deficit may push up the term premium, and the 10-year U.S. Treasury yield may rise by another 1.3%.

2. Tactical allocation strategy for interest-bearing bonds

In a volatile environment, short-term assets have become the first choice for risk aversion. BlackRock recommends increasing holdings of 3-7 year Treasury bond ETFs (such as iShares 3-7 Year Treasury Bond ETF, code IEI). Such assets can capture the current coupon income of about 4% and avoid the risk of long-term interest rate increases.

Data shows that as of June 2, the yield on 2-year U.S. Treasury bonds was 3.93%, 5-year bonds was 4.00%, and 10-year bonds had risen to 4.44%. The steepening of the term spread highlights the relative value of short-term bonds.

TIPS deserve special attention. Although short-term inflation data is strong, in the long run, if the Fed starts a rate cut cycle, the downward trend of real interest rates will push up TIPS prices.

Taking iShares TIPS Bond ETF (TIP) as an example, its volatility in the past year is only 7.2%, which is significantly lower than that of ordinary Treasury ETFs, and is suitable for hedging inflation risks.

3. The logic of credit bond selection

High-grade credit bonds have both offensive and defensive capabilities. Under the downward trend of broad-spectrum interest rates, the credit spreads of investment-grade corporate bonds have been compressed to historical lows, but they can still provide a yield to maturity of 3.5%-4%.

For example, the 5-year corporate bond recently issued by JPMorgan Chase has a face rate of 4.2%, which is 80 basis points higher than the same-term Treasury bonds, and has allocation value.

The tax advantages of municipal bonds are prominent. The tax exemption policy at the federal level makes municipal bonds very attractive to high-income investors.

Taking the 10-year AAA-rated municipal bonds issued by New York State as an example, the current yield is 3.4%, which is equivalent to the after-tax return of 7% of taxable bonds (assuming a federal tax rate of 37% + state tax of 10%).

In addition, green municipal bonds (such as Massachusetts's clean water project bonds) not only enjoy tax exemption, but also obtain ESG investment premiums, and the oversubscription rate has often exceeded 30% in recent years.

4. The hedging value of risky assets

The negative correlation between gold and government bonds has increased. While U.S. Treasury yields soared, the price of COMEX gold futures broke through $2,100/ounce, reflecting the funds' concerns about "de-dollarization".

BlackRock recommends allocating 5%-10% of gold ETFs (such as SPDR Gold Shares, GLD), which can not only hedge inflation, but also alleviate the impact of U.S. Treasury fluctuations on the portfolio.

Flexible allocation funds provide tactical flexibility. For example, iShares Flexible Income Active ETF (BINC) captures relative returns in interest rate fluctuations by dynamically adjusting the proportion of holdings of government bonds, corporate bonds and emerging market bonds.

The fund's annualized volatility in the past year was 11.5%, which is lower than the average level of its peers and is suitable for investors seeking stable returns.

5. Long-term layout under policy game

Pay attention to the signal of the Fed's policy shift. Although the interest rate meeting in June is likely to keep the interest rate unchanged, the market has begun to price in the expectation of a rate cut in the second half of the year.

If the May non-agricultural data (released on June 6) shows a weak job market, the 10-year US Treasury yield may fall to 4.2%, providing an entry opportunity for long-term investors.

Be wary of the chain reaction of fiscal risks. If Congress fails to raise the debt ceiling in a timely manner, the US Treasury auction may fail, exacerbating the market liquidity tension.

Investors can arrange short-term cash assets (such as money market funds) in advance and pay attention to the safe-haven value of highly liquid bond ETFs (such as iShares Short Treasury Bond ETF, SHV).

In an environment of increasing interest rate volatility, opportunities and risks coexist in the bond market. Investors need to build a combination framework of short duration + high credit + tax optimization + alternative hedging, while closely tracking inflation data, policy trends and fiscal progress.

As JPMorgan Chase CEO Jamie Dimon said: "The fragile equilibrium of the US bond market requires refined operations." Through active management and dynamic adjustments, investors are expected to achieve steady appreciation of assets in turmoil.