• Treasury yields are near multi-decade highs, but elevated rate volatility means it may be too early to buy aggressively, says Federated Hermes (FHI) CIO R.J. Gallo.
  • Gallo warns another wave of bond-fund selling could push yields even higher before markets stabilize.
  • He favors short duration, with mortgage-backed securities potentially attractive once volatility subsides.

A Cautious Stance on Duration

Treasury yields have retreated from their recent peaks, but the sharp late-September selloff that pushed the 10-year note to around 5.25%—its highest since 2007—has left investors grappling with whether to lock in these generationally high yields or wait for more stability. R.J. Gallo, chief investment officer of global fixed income at Federated Hermes, has a clear message: don’t rush.

“While attractive headline yields are tempting, the risk of another wave of bond-fund selling could push yields even higher before markets stabilize,” Gallo said, according to people familiar with his views. He advocates for short duration—Treasury bills, short notes, and cash-management funds—to limit sensitivity to further rate increases while preserving the ability to reinvest at higher yields.

The 30-year yield briefly touched 5.61%, a level not seen since 2002–04, and the MOVE bond-volatility index jumped about 30% in a single week, its largest increase since the tariff-related turmoil of April 2025. That volatility, Gallo argues, makes extending duration a risky proposition despite the allure of high coupons.

Volatility and Supply Pressures

The late-September selloff was fueled by a confluence of factors: rising oil prices amid Iran-related supply concerns reignited inflation fears, while heavy Treasury issuance and worries about the U.S. fiscal outlook added upward pressure on yields. Stronger-than-expected economic data also reduced confidence that the Federal Reserve can ease policy aggressively.

“The key risk is not simply the Fed’s policy rate; it is the possibility that investors demand a higher term premium—extra compensation for owning long-dated government debt amid inflation, supply, and fiscal uncertainty,” Gallo noted.

Market participants are also watching corporate borrowing, particularly for AI-related investments, which has added to the supply of bonds. Globally, government-bond markets from Europe to Asia have faced similar pressures, underscoring the broad nature of the selloff.

Mortgage-Backed Securities: A Potential Opportunity

Gallo sees agency mortgage-backed securities (MBS) as an area that could become attractive once volatility subsides. MBS spreads widened as rate volatility rose, improving their yield compensation. However, prepayment and extension risks become harder to price during abrupt rate swings, making timing crucial.

“MBS can become more attractive after volatility subsides because their yield/spread compensation improves, but they contain prepayment and extension risk that becomes harder to price during abrupt rate swings,” he explained.

For now, Gallo’s short-duration preference is fundamentally a risk-management stance: earn meaningful income today, avoid excessive exposure to another abrupt move higher in long rates, and retain capacity to add duration or agency MBS once volatility and the supply-demand balance show clearer signs of stabilizing.

The Bigger Picture

The surge in yields has significant implications for households and businesses. The 10-year Treasury rate is a key benchmark for mortgage borrowing, so sustained yields above 5% can weigh on housing affordability and home sales. Businesses face higher borrowing costs for investment, refinancing, and acquisitions. Meanwhile, savers and retirees can finally earn attractive income from cash and short-duration bonds, though existing holders of long bonds face mark-to-market losses.

Federated Hermes, with $911.6 billion in assets under management as of June 30, 2026, remains a major player in money markets and fixed income. Its money-market AUM stood at $499.9 billion, up 7% year over year, reflecting investors’ continued preference for liquid, high-yielding short-term instruments. The firm’s record AUM was supported by equity and private-market growth, and its Q2 earnings beat Wall Street expectations.

Gallo’s stance has evolved from “do not rush” to “high yields are beginning to look compelling,” but he retains the condition that investors should wait for signs of market clearing and more stable rate volatility before making a large long-duration commitment. With forecasts from Nuveen and Goldman Sachs (GS) projecting the 10-year yield around 4.75% by year-end 2026, the path forward remains uncertain. For now, patience and short duration appear to be the watchwords.

Correction: An earlier version of this article misstated the year of the tariff-related market turmoil. It was April 2025, not 2024.