Following weeks of selling in US Treasuries that pushed yields to multi-year highs, Wall Street strategists are rediscovering the appeal of bonds.

Goldman Sachs and Citi were the first to make their case, recommending that investors increase duration exposure to Treasuries based on credit market stress signals and the logic of cooling inflation, respectively. The shift comes as the 10-year Treasury yield edged back slightly from multi-decade highs, with strong demand at an auction last week providing the market with some breathing room.

Not all institutions are following suit, however. Bank of America and Barclays have taken a more cautious stance, warning that the market may be underestimating the probability of a Federal Reserve rate hike this month and stressing that high yields alone are not sufficient justification for buying duration. The US inflation data due this week will serve as a critical test of these diverging views.

Goldman Sachs and Citi Lead, with Different Bullish Rationales

A Goldman Sachs strategist team led by William Marshall wrote in a report last Friday: "The valuation-based argument for stable or lower G10 yields has been challenging recently, but long-end forward rates remain elevated relative to fair value levels in most major markets, and multiple factors together reinforce the judgment that duration is attractive at current levels."

Goldman Sachs noted that cracks appearing in the credit market, improved investor positioning structure, and a decline in foreign central bank holdings of Treasuries as the dollar strengthened — the latter suggesting that some selling stemmed from FX intervention rather than deteriorating fundamentals — all support expectations of a Treasury rebound.

Citi strategists led by Jason Williams focused their bullish case on the short end, favoring 2-year to 3-year Treasuries. Citi argued that cooling inflation and weakening wage growth make it unlikely the Fed will raise rates to the peak level seen in 2023, and expects the October policy meeting to hold rates steady. Citi forecast core CPI month-over-month at 0.18% and stated that "even a 0.3% month-over-month core CPI reading would not be sufficient to support an October rate hike."

Multiple Institutions Follow, but Divergences Are Clear

Morgan Stanley strategists led by Matthew Hornbach argued that unless nominal GDP is expected to compound at 5.7% annually over the next decade and core PCE stays persistently above 2.5%, current Treasury yields already offer value. Their economists forecast next year's nominal GDP growth at 4.5%, "strongly suggesting" the 10-year yield should be below 5.25%. However, Morgan Stanley recommended that investors wait until after this month's policy meeting and the midterm elections before entering.

MUFG strategists led by George Goncalves said recent strong demand at Treasury auctions shows the market has offered "sufficient concessions to attract value investors," that Treasuries have entered a "deep value zone," and identified the midterm elections as a potentially important catalyst for the bond market.

Wells Fargo strategists led by Erik Nelson likewise pointed to "positive signals" for duration: the 10-year yield has retreated from its 5.35% high, mid-month auctions were absorbed smoothly, and 1-year 10-year rate volatility has also pulled back from elevated levels.

Bank of America and Barclays Remain Skeptical, Warning of Rate Hike Risk

Bank of America strategists led by Mark Cabana questioned market pricing, arguing that swap traders are underestimating the likelihood of a Fed rate hike this month — the market is currently pricing only a 19% probability, which Bank of America considers "too low." The team noted that ahead of the inflation data release, dovish comments from Fed officials Williams and Jefferson, along with market expectations of a "high bar for a rate hike before the elections," have combined to depress rate hike pricing, but "if US data remains strong, the Fed will face a choice: hike or tolerate a surge in bond market rates."

Barclays strategists Anshul Pradhan and Demi Hu pointed out that rising yields have already tightened financial conditions, and the broad increase in volatility signals that "the market is reassessing not only the near-term policy path but also the uncertainty surrounding the long-term neutral rate." Barclays maintained its recommendation for steepening the 1-year forward 2s10s SOFR curve and emphasized that "investors are being compensated for duration, but that compensation itself neither protects against further yield increases nor serves as a mechanical signal to buy duration."

Inflation Data Becomes the Key Near-Term Variable

Multiple institutions view this week's US inflation report as the core reference for judging the direction of interest rates. Goldman Sachs, Citi, and TD Securities all forecast core CPI month-over-month at approximately 0.2%, a slowdown from the prior reading. TD Securities strategists led by Gennadiy Goldberg expect the "super core" component to cool somewhat, while goods and housing components edge slightly higher.

Meanwhile, BMO strategists led by Ian Lyngen flagged that the Fed's primary dealer survey constitutes an "event risk," noting market rumors that Treasury Secretary Bessent may reduce the size of 20-year and 30-year Treasury auctions. Citi shares the same expectation, believing this would provide relative support for long-end Treasuries.

As of the bond market close before the holiday, the 10-year Treasury yield stood at approximately 5.24%, while the 2-year yield hovered near 4.8%. UBS strategists led by Phoebe White said that although yields appear higher than fair value, they maintain a "tactically neutral" stance on duration given strong economic activity and geopolitical risks to energy prices.