Bond-market risks haven’t disappeared. But with the 10-year Treasury yielding above 5%, investors are finally being paid considerably more to take them.

Last week, one of the five questions I said I’d be watching during the final three months of 2026 was:

How high can the 10-year Treasury yield go before stocks care?

This week, I want to ask a different question.

At what point should bond investors start caring – in a good way?

With the 10-year Treasury yield above 5%, I think we’re getting there.

I’m not suggesting yields have peaked. I’m not convinced the Federal Reserve is finished raising rates. And I’m certainly not declaring victory over inflation.

In fact, I believe the Fed probably has one more rate hike ahead. But I also believe inflation is unlikely to accelerate meaningfully from here. If that’s correct, today’s Treasury yields are becoming increasingly difficult to ignore.

I don’t think the risks in bonds have disappeared. I think investors are finally being paid enough to take some of them.

And that means it may be time to start adding duration.

1. A 5%+ Starting Yield Changes the Equation

For much of the past decade, investing in high-quality bonds required investors to accept a frustrating tradeoff.

Take duration risk.

Receive very little income.

That equation looks very different today.

With the 10-year Treasury yielding above 5%, investors aren’t just getting substantially more income. They’re also starting with a much larger cushion if yields continue moving higher.

That’s important because one of the most overlooked variables in fixed-income investing is the starting yield.

When yields are extremely low, even a relatively modest increase in interest rates can wipe out a significant amount of income through falling bond prices.

At today’s yields, investors have considerably more income working in their favor.

That doesn’t eliminate duration risk. If the 10-year Treasury moves from roughly 5.3% to 6%, longer-duration bonds will experience price declines.

But an investor collecting more than 5% annually has a much larger buffer than an investor earning 2% or 3%.

At 3% yields, investors needed a lot to go right. At 5%+, they can afford to be a little wrong.

That’s a meaningful change in the risk/reward equation.

2. The Fed Can Raise Rates Again – and Bonds Can Still Be Attractive

One reason investors may hesitate to extend duration is straightforward:

What if the Fed isn’t finished?

I don’t think it is. My base case is that the Fed raises rates one more time before this tightening cycle ends. But I can believe the Fed has another rate hike ahead and still believe intermediate and longer-term bonds are becoming attractive.

Those aren’t contradictory views.

The Federal Reserve directly controls short-term interest rates. The 10-year Treasury yield is influenced by something much broader: expectations for future Fed policy, economic growth, inflation, Treasury supply, fiscal policy and the additional compensation investors demand for holding longer-term debt.

Markets also anticipate.

If investors wait for the Fed to officially announce that the tightening cycle is finished before extending duration, there’s a real possibility the bond market will have already moved.

We’ve seen versions of this before. Markets don’t politely wait for the economic data to become obvious. They price expectations.

That’s why trying to identify the exact peak in Treasury yields is probably the wrong objective.

I don’t know whether 5.3% is the high. Maybe the 10-year reaches 5.5%. Maybe it reaches 6%.

But I don’t think investors need to perfectly identify the top to recognize that the opportunity has improved considerably.

Waiting for certainty usually means paying a higher price for it.

3. Inflation Doesn’t Need to Collapse

The biggest risk to my view is inflation.

If inflation accelerates meaningfully again, the Fed may need to tighten more aggressively, and longer-term Treasury yields could move higher. That’s not my base case. I’m also not expecting inflation to suddenly fall back to 2%.

The more important question for bond investors may simply be:

Does inflation stop getting worse?

If inflation stabilizes and gradually moderates, today’s Treasury yields become increasingly attractive.

Think about the starting point.

A Treasury yielding more than 5% in an environment where inflation is no longer accelerating creates a much different real-return proposition than we’ve had for much of the past several years. And if economic growth eventually slows, the opportunity becomes even more interesting.

In that scenario, investors could potentially receive two sources of return:

Income from today’s higher yields and price appreciation if Treasury yields eventually decline.

That’s where duration becomes valuable again. For several years, duration was something investors were punished for owning.

At today’s yields, it may increasingly become something investors want back in their portfolios.

4. The Risks Are Real. So Is the Compensation.

None of this means the coast is clear. There are legitimate reasons Treasury yields could continue climbing.

Inflation could reaccelerate.

Oil and other commodity prices could remain elevated.

Economic growth could remain stronger than expected.

Fiscal deficits and heavy Treasury issuance could keep upward pressure on longer-term rates.

Investors could continue demanding a larger term premium to own long-duration government debt.

And the Fed could ultimately raise rates more than I expect.

Those risks matter. But here’s what has changed:

The risks aren’t necessarily new. The price investors are being paid to accept them is.

That’s the part I think deserves more attention.

Investing isn’t about waiting until every risk disappears. If we did that, we’d probably never invest. It’s about determining whether the expected return adequately compensates us for the risks we’re taking.

At 2% Treasury yields, I wasn’t particularly interested in accepting significant duration risk.

Above 5%?

That calculation looks very different. The opportunity doesn’t require everything to go perfectly.

5. Duration Can Play Defense Again

There’s another reason I’m becoming more constructive on duration that has less to do with forecasting interest rates:

Diversification.

For decades, high-quality bonds played two primary roles in portfolios.

They generated income, and they provided ballast when economic growth deteriorated and equities struggled.

The low-rate environment weakened both arguments. When Treasury yields were 1% or 2%, investors weren’t receiving much income for holding bonds. And because yields had so little room to fall, the potential for meaningful price appreciation during periods of economic weakness was more limited.

Today’s starting point is very different.

A Treasury yielding above 5% provides meaningful income even if the economy remains resilient and interest rates stay elevated. But consider what happens if my economic outlook is wrong.

I’ve generally been constructive on the resilience of the U.S. economy. But suppose growth slows much more sharply than I expect. The labor market weakens. Consumer spending deteriorates. Corporate earnings come under pressure.

That would likely be difficult for equities. It could also create an environment where Treasury yields fall.

Suddenly, duration could potentially generate price appreciation at exactly the time the equity side of a portfolio needs help.

That’s an important part of the argument for adding duration today.

I’m not only interested in duration because I believe inflation can stabilize. I’m interested because duration could become valuable if my economic outlook proves too optimistic.

That creates a potentially attractive portfolio tradeoff.

If the economy remains resilient, investors continue collecting attractive income. If the economy deteriorates and yields decline, duration could potentially provide capital appreciation and portfolio diversification.

There are no guarantees that stocks and bonds will always move in opposite directions. We learned that lesson painfully when inflation drove both stock and bond prices lower.

But if inflation stabilizes, the relationship between stocks and high-quality bonds could become more useful again.

That’s why I increasingly view duration as more than a yield opportunity. It may also be able to play defense again.

Don’t Make a Duration Bet. Start Building Duration.

For the past few years, investors have had a very compelling alternative to taking duration risk:

Cash.

Money-market funds, Treasury bills and ultra-short bonds offered attractive yields with very little interest-rate risk. It wasn’t difficult to understand why investors stayed short.

But there’s another risk that becomes increasingly important as the rate cycle matures:

Reinvestment risk.

Today’s cash yield isn’t locked in for the next five or ten years. If inflation eventually moderates, economic growth slows and the Fed moves from raising rates to cutting them, short-term yields could fall quickly.

By the time investors feel completely comfortable moving out of cash, the 10-year Treasury may no longer yield 5%+. That’s why I wouldn’t view today’s environment as an all-or-nothing decision.

I’m not suggesting investors abandon cash and make one enormous bet on long-duration bonds. I’d rather gradually add duration while yields are attractive.

That could mean moving incrementally from cash and ultra-short bonds toward intermediate-duration bonds. It could mean building a Treasury or high-quality bond ladder. It could mean adding duration in stages so that additional increases in yields become opportunities to invest at even more attractive levels rather than reasons to panic.

There’s an important psychological advantage to that approach as well. You don’t have to identify the exact top in yields. If yields decline, you’ve locked in some attractive income and gained duration exposure. If yields rise further, you still have capital available to invest at better yields.

That’s a tradeoff I’m increasingly comfortable making.

The View From 6,230

For much of the past several years, fixed-income investors have had a simple question:

Why take duration risk when I can earn an attractive yield in cash?

It was a fair question.

At Treasury yields around 5.3%, I think the question is starting to change.

Inflation remains a risk. The Fed may not be finished. Fiscal concerns aren’t going away. And yields could absolutely move higher from here. But investors are finally receiving meaningful compensation for accepting those risks.

And duration potentially offers something else again: diversification.

If the economy remains resilient, today’s yields provide meaningful income. If growth deteriorates more than I expect and Treasury yields decline, duration could potentially provide price appreciation at a time when equities are under pressure.

I don’t know whether we’ve reached the peak in the 10-year Treasury yield. And I’m not going to pretend that I do.

But maybe that’s no longer the question investors need to answer.

The starting point matters.

At today’s yields, investors can generate meaningful income, create a larger cushion against additional rate increases, potentially benefit if economic growth and inflation moderate, and restore some defensive characteristics to the fixed-income portion of a portfolio.

That’s enough for me to become more constructive on duration.

Not all at once.

Not because the risks have disappeared.

And certainly not because I think I can call the exact top in yields.

But because the opportunity is finally beginning to outweigh the risks.

The case for duration isn’t that I know exactly where interest rates are going next.

It’s that at today’s yields, I no longer need to.

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This week on Views from 6,230: Referrals Aren’t Enough: How Investors Choose Advisors.

I had the pleasure of speaking with Megan (Meg) Carpenter, CEO and co-founder of Ficomm Partners to discuss FiComm’s The New Growth Equation report based on a survey of 1,000 high-net-worth investors.  We explore findings that challenge the industry’s reliance on referrals and so much more.

The Week Ahead

Be on the lookout for our next episode of Views from 6,230, where I sat down with Steve Katznelson, Managing Director and CIO of Radcliffe Capital Management, on where bond-market inefficiencies still exist and how investors should think about credit, duration, and liquidity risk.