Five percent Treasury yields might feel like a scare. But according to Canary Capital CEO Steven McClurg, the real horror story could be an 8% 10-year yield within four years. He warns that mounting government borrowing could prolong the bond bear market, a shift that would ripple through everything from long-duration bond ETFs to the way investors think about safety.
His outlook points to a potential shift away from long-duration bonds toward Treasury Inflation-Protected Securities (TIPS), commodities and floating-rate debt.
"The magnitude of bond issuance to cover the debt service will create a supply imbalance pushing rates higher to 8% in the mid-term," McClurg said in an interview with MarketDash.
Why Long-Duration Bond ETFs Could Face Pressure
In his investment thesis, McClurg argues that persistent fiscal deficits, a ballooning defense budget and the capital-intensive AI build-out could keep long-term yields under upward pressure.
If this higher-rate scenario unfolds, McClurg recommends reducing exposure to long-duration bonds.
"I would sell long duration bonds and mid cap discretionary equities, and replace with energy commodities and variable-rate bonds," he said.
The iShares 20+ Year Treasury Bond ETF (TLT) illustrates the risk investors face holding long-maturity U.S. government debt. Because bond prices generally fall when yields rise, TLT's long-duration exposure could leave it vulnerable to further losses if Treasury yields climb substantially. The fund is an example of the exposure McClurg is cautioning against, not an ETF he specifically identified.
Alternatives Over Conventional Fixed-Income Investments
"The alternatives are TIPS, well-capitalized companies, commodities, and crypto (which do not issue debt)," he said.
For investors exploring these ideas through ETFs, the Schwab U.S. TIPS ETF (SCHP) and the iShares TIPS Bond ETF (TIP) provide exposure to Treasury Inflation-Protected Securities, whose principal adjusts with inflation. TIPS can help protect purchasing power, although their market prices can still decline when real yields rise.
For commodities, the Invesco DB Commodity Index Tracking Fund (DBC) offers diversified exposure through commodity futures. Investors seeking a more targeted energy allocation could examine the Energy Select Sector SPDR Fund (XLE), which holds energy stocks rather than commodities directly.
The iShares Floating Rate Bond ETF (FLOT) offers exposure to investment-grade corporate debt with interest payments that adjust with short-term rates. Floating-rate securities generally have less sensitivity to interest-rate changes than conventional fixed-rate bonds, although credit risk remains.
A Longer-Term Bond Market Shift?
On the bond market, McClurg made an interesting comment. "A secular bond bear market will likely last for 30+ years. We are 10 years in already, as the yield has moved from 1.37% at the low point in 2016," he said.
His 8% yield forecast is not guaranteed. Inflation, fiscal policy and investor demand could all alter the trajectory. But if yields keep rising, investors may increasingly look at inflation-protected securities, commodities, and floating-rate debt as alternatives to long-duration bonds.
