U.S. Treasury funds draw record inflows as yields hit multi-decade highs

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US Treasury funds draw record inflows

Highlights

U.S. government bond funds attract $14 billion since October and record $59.3 billion in Q3, driven by surging 10-year yields at 5.24%.
Strong investor demand absorbs recent $39 billion 10-year Treasury auction at a 24-year high yield of 5.36% as primary dealers’ role hits a two-decade low.
Fund managers favor 10-year Treasuries for nearly 3% real yields, shifting from cash, but remain cautious on longer maturities amid volatile supply-demand dynamics.

Record inflows and renewed demand

As reported by Financial Times, investors have put nearly $14 billion into U.S. government bond funds since the start of October after record net inflows of $59.3 billion in the third quarter, based on EPFR data. The shift comes as the 10-year Treasury yield rises 1.06 percentage points this year to 5.24%, making sovereign bonds more attractive to large asset managers despite continued market volatility.

Vincent Mortier, chief investment officer at Amundi, says the yield level is naturally attracting new interest and that the firm's teams are progressively adding Treasury exposure in dollar-denominated portfolios. He says market expectations that inflation will average about 2.35% over the next decade leave investors with a real return of nearly 3% on 10-year Treasuries.

Demand is also strong at recent Treasury auctions. The $39 billion sale of 10-year notes last Wednesday draws robust buying just hours after yields touch a 24-year peak of 5.36%, while primary dealers record their lowest participation rate since 2003, indicating investors absorb more of the supply; auctions for three-year and 30-year debt are also solid.

Portfolio shifts and maturity risks

Fund managers still stop short of declaring the sell-off over, but several say current yields compare favorably with other asset classes. Dan Ivascyn, chief investment officer at Pimco, says Treasuries look attractive relative to equities near record highs and corporate bonds that offer only limited extra compensation over low-risk U.S. government debt.

Greg Peters, co-chief investment officer at PGIM Credit, says a U.S. 10-year yield above 5% is a good medium- to longer-term holding, but he is less comfortable with 30-year Treasuries. Vishal Khanduja, head of broad markets fixed income and portfolio manager at Morgan Stanley Investment Management, also describes maturities of up to 10 years as attractive, while saying conviction is lower on 20- and 30-year debt because supply and demand dynamics become more volatile further along the curve.

Khanduja says these yield levels are compelling enough to encourage investors to shift out of cash or floating-rate securities and lock in fixed returns. He also warns that valuation becomes harder to judge when non-economic players distort demand and supply in the long end of the market, while Peters says renewed stress in France or wider Eurozone bond markets could send more money into U.S. Treasuries as investors seek safety.

In our earlier article on the IMF’s warning about mounting strain in sovereign debt markets, we highlighted how high debt loads and renewed inflation risks could trigger a sharp, disorderly rise in government bond yields with broad spillovers across global asset prices. We also noted the IMF’s concerns about rollover risks, liquidity vulnerabilities, and heavier competition for investor capital as large AI-driven corporate issuance grows alongside government borrowing needs.

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