The primary threat to the high-yield market isn't a wave of corporate defaults, but rather a reversion of the compressed risk premium that investors demand. This premium has been historically low, and a return to normal levels presents a significant valuation risk, even if fundamentals remain stable.

Contrary to fears of a spike, a major rise in 10-year Treasury yields is unlikely. The current wide gap between long-term yields and the Fed's lower policy rate—a multi-year anomaly—makes these bonds increasingly attractive to buyers. This dynamic creates a natural ceiling on how high long-term rates can go.

After a decade of negative real returns, bonds are now attractive on a pure valuation basis relative to equities. PIMCO's CIO suggests bonds may outperform stocks over the next 5-10 years, making a compelling case for allocation regardless of their traditional role as a correlation hedge.

The true signal of a recession is not just falling equities, but falling equities combined with an aggressive bid for long-duration bonds (like TLT). If the long end of the curve isn't rallying during a selloff, the market is likely repricing growth, not panicking about a recession.

Concerns over US term premium have receded partly because the Treasury buyer base has stabilized. The declining share of price-insensitive buyers (Fed, foreign investors, banks), which fell from 75% to 50% over a decade, has finally stopped falling, creating a more supportive demand backdrop.

In a market where everyone is chasing the same high-quality corporate bonds, driving premiums up, a defensive strategy is to pivot to Treasuries. They can offer comparable yields without the inflated premium or credit risk, providing a safe haven while waiting for better entry points in credit markets.

Jeff Gundlach notes a significant market anomaly: long-term interest rates have risen substantially since the Fed began its recent cutting cycle. Historically, Fed cuts have always led to lower long-term rates. This break in precedent suggests a fundamental regime change in the bond market.

With credit curves already steep and the U.S. Treasury curve expected to steepen further, the optimal risk-reward in corporate bonds lies in the 5 to 10-year maturity range. This specific positioning in both U.S. and European markets is key to capturing value from 'carry and roll down' dynamics.

A new market dynamic has emerged where Fed rate cuts cause long-term bond yields to rise, breaking historical patterns. This anomaly is driven by investor concerns over fiscal imbalances and high national debt, meaning monetary easing no longer has its traditional effect on the back end of the yield curve.