How Can You Profit from the Bond Market Crisis? Here's What Fund Managers Recommend

Yields on government bonds in developed countries have been rising almost nonstop, with some reaching their highest levels in the past quarter-century. This rise is driven by massive debt and budget deficits. High interest rates increase the cost of servicing public debt and also make borrowing more expensive for businesses and households. However, there are also advantages for investors: for example, it is now easy to earn a guaranteed high return on investments.

The yield on 10-year U.S. Treasury bonds reached 5.34% on Thursday—the highest level since 2002. The yield on comparable French bonds also rose to the level seen in that same year (4.96%). In the United Kingdom, 30-year bonds were yielding more than 6% annually for the first time since 1998.

Investors should take advantage of the current situation, Dan Ivesin, chief investment officer at Pimco—one of the world’s largest bond fund management companies— told The Wall Street Journal.

In his view, it is now possible to “build a high-quality portfolio with a return of 6% or 7%,” which will outperform the stock market.

Although the U.S. S&P 500 index may post double-digit growth in 2026 for the fourth consecutive year, it has been virtually flat since the beginning of the summer, and many of the stocks in the index are already very expensive.

Moreover, the market’s strength is driven primarily by stocks of companies involved in artificial intelligence. Meanwhile, shares of companies whose performance depends on the cost of capital—as well as small firms, not to mention unprofitable tech startups—have fallen sharply.

"While the entire S&P 500 is down 2% from its highs, 'most of the market has fallen by at least 5%, not to mention those segments where the decline has exceeded 15%,' " Dan Suzuki, global investment strategist at iCapital: “This is largely due to rising interest rates and the accompanying tightening of financial conditions.”

For now, the stock market is weathering rising yields, given that economic growth and corporate earnings remain strong, says Eric Deaton, president of The Wealth Alliance: “But the biggest risk to stocks is that something could go wrong with the development of AI. If earnings forecasts deteriorate sharply, it will lead to more widespread losses in the stock market.”

Even if that happens, it will still be possible to earn a good return on bonds—specifically, those issued by AI companies.

With investment-grade ratings, high profits, and strong cash flow, these companies offer attractive yields on their bonds, given the rise in government bond yields.

Tech giants building AI infrastructure are now the largest bond issuers, notes Brian Waylen, director of fixed-income investments at TCW. They are competing with governments for investors’ capital (which may be one reason for the rise in government bond yields), but interest rates are not particularly important to them.

"More than half of U.S. economic growth is driven by borrowers who are insensitive to changes in interest rates," Waylen told the WSJ.

In his view, even if the U.S. Federal Reserve raises rates one, two, or three more times, it won’t make much of a difference to this part of the economy—including the AI sector—but investors will enjoy higher returns.

Billionaire Ray Dalio, founder of the hedge fund Bridgewater Associates and author of several books on finance, fears that excessive government debt is beginning to undermine economic growth. For example, the U.S. spends more than $1 trillion annually on debt service, and such payments are beginning to “crowd out” other government spending—not only in the U.S. but also in other Western countries.

Dalio recommends having a well-diversified portfolio but avoiding investments that are sensitive to changes in interest rates, according to The Wall Street Journal.

An investor will receive a guaranteed fixed annual income if they purchase the bonds directly and hold them until maturity. In this situation, it does not matter to them how the price of the securities changes.

When investing in a bond fund, the situation becomes less certain. A bond’s yield moves in the opposite direction of its price. A fund can generate returns not only from yields but also by trading the security based on changes in its price. Therefore, when yields were close to zero during the past decade or following the coronavirus pandemic, many funds still performed well thanks to rising bond prices.

Right now, as yields rise, prices are falling. This could reduce the value of the fund’s assets, and a lot depends on the fund manager’s skill in this situation.

The funds managed by Rick Rieder, BlackRock’s chief investment officer for global fixed income, are yielding more than 7% on investments in securities with a three-year duration. “I’ve been waiting 40 years for an opportunity like this,” he told the WSJ.

Reader's answer is a cautious "yes." He points out that in the past, when the yield on 10-year U.S. Treasury bonds exceeded 5%, returns over the following year were quite high.

High interest rates attract a large number of investors; as a result, yields begin to fall and prices begin to rise.

Therefore, according to him, Reader is beginning to add bonds with longer maturities to his portfolio, anticipating that their higher yields will start to decline more sharply and their lower prices will begin to rise more quickly.

In the past, rising interest rates and yields in developed countries have led to even greater increases in emerging markets. Due to higher risks, emerging-market bonds have traditionally traded at a spread (premium) relative to the yields on developed-country government bonds; moreover, capital flight during periods of stress has driven further declines in the prices of emerging-market bonds.

In recent years and decades, many developing countries have pursued more responsible fiscal policies, strengthened their institutions—including the independence of their central banks—and kept inflation under control. As a result, while the yield on 10-year U.S. Treasury bonds rose from 4.8% to 5.3% in September, yields on bonds from major developing countries such as South Africa, Chile, India, they rose much less, and in Brazil, for example, they actually fell, the Financial Times notes.

"Given the scale of the shock [in developed countries], I have to say that [developing] countries are holding up very well," says Luis Costa, Citi's global head of emerging markets strategy.

Over the past year, the JPMorgan GBI-EM Global Diversified Composite Index of emerging-market bonds denominated in local currencies has risen by 18% (this represents the total return, which takes into account changes in bond prices and coupon payments). You can invest in it through an ETF that tracks this index.

From the beginning of 2026 through the end of August, the index rose 3.5%, despite the energy shock caused by the war in the Middle East. Following the September sell-off, the index broke even for the year-to-date period, while the Bloomberg Global Treasury Developed Countries bond index fell 4.5%.

Reforms aimed at curbing the growth of public debt and inflation “played an important role in protecting the country from a global bond revaluation in 2026,” Lesetja Kganyago, governor of the South African Reserve Bank, told the FT. Admittedly, inflation has exceeded the central bank’s target over the past six months, but “that’s much better than the 67 months in the U.S.,” he added.

The current yield on long-term bonds denominated in South African rand is about 9% “roughly corresponds to the level at the end of 2025 and is significantly lower than previous levels,” despite U.S. yields rising to a more than 20-year high, Kganyago added.

The local-currency bond index for frontier markets, which JPMorgan recently began calculating, has risen by more than 7% this year. It includes bonds issued by oil exporters such as Nigeria and Kazakhstan, whose currencies have posted some of the highest rates of appreciation against the dollar this year, and whose inflows of foreign exchange earnings have increased significantly.

“Emerging markets are holding up well,” says Harriet Ballard, a portfolio manager at Aviva Investors. “In terms of fiscal stability and economic growth, many of them are in a more favorable position compared to developed countries.”

This article was AI-translated and verified by a human editor