In an era of US long-term interest rates exceeding 5%, when should you 'buy and sell' bond investment trusts? Reading the relationship between government bond yields and net …

The rise in US long-term interest rates shows no signs of stopping. The 10-year Treasury yield surpassed 5% on an intraday basis on September 14, and as of October 2 (afternoon in the NY market), it stands at 5.27%, with the 30-year bond at 5.62% [1][5]. In this environment, an increasing number of people are confused, wondering, “Bonds are supposed to be safe assets, so why is the net asset value falling?”

In this article, we will examine how the net asset value of bond investment trusts specifically moves when government bond interest rates change using three methods: calculation formulas, past performance, and the author’s own estimates. Based on this, we will organize how to think about the timing of buying and selling.

Conclusion first

1. Rather than trying to guess the peaks and bottoms of interest rates to trade, it is more reproducible to decide based on the relationship between the timing of when you need the money and the fund’s duration (interest rate sensitivity).

2. For a comprehensive bond fund (duration of approximately 5.7 years), at current yield levels, interest income can cover up to an interest rate increase of approximately 0.9–1.0 percentage points over one year. Beyond that, you will see a loss of principal on a one-year basis.

3. The design is such that the net asset value, which has fallen due to rising interest rates, will be recovered when the holding period slightly exceeds the duration. You should avoid putting money you need within a few years into long-term bond funds.

*This article is for informational purposes only and does not recommend the purchase or sale of any specific product. The estimates are examples based on the author’s assumptions and do not predict the future.

1. What is happening now (as of October 3, 2026)

The US 10-year Treasury yield hit 5.01% intraday on September 14, marking its first time in the 5% range since October 2023 [5]. The Federal Reserve (FRB) raised the policy interest rate by 0.25 percentage points to 3.75–4.00% on September 16, and the year-end policy rate forecast (median of the dot plot) is 4.1%, suggesting one more rate hike within the year [9][10][11].

However, the employment report on October 2 was weak, and expectations for an October rate hike fell from about 28% before the announcement to 12.9% at one point, before returning to the 20% range. The 10-year Treasury yield also fell to the 5.15% range before rebounding, eventually ending trading at around 5.27% [1]. The structure is that “even if short-term rate hike expectations recede, long-term interest rates are difficult to lower” [3].

In Japan, the Bank of Japan raised its policy interest rate to around 1.25% on September 18 [12], and the Japanese 10-year government bond yield is 3.09% (October 1) [16].

$$
begin{array}{|l|r|l|} hline
Item&Level&Time hline
US FF Rate (Target)&3.75-4.00%&After 9/16 hike
FOMC Forecast (Year-end median)&4.1%&September meeting
US 2-Year Treasury Yield&4.83%&10/2 (NY PM)
US 10-Year Treasury Yield&5.27%&10/2 (NY PM)
US 30-Year Treasury Yield&5.62%&10/2 (NY PM)
BOJ Policy Rate&Around 1.25%&After 9/18 hike
Japan 10-Year JGB Yield&3.09%&10/1 hline
end{array}
$$

2. Background of rising interest rates: Looking at the contents of “high prices” with numbers

I will organize what I have been able to confirm regarding “tariffs, the Middle East, and AI.”

• Energy (Middle East factor): The US CPI for August was 3.4% year-on-year for the headline, and 2.4% for the core, which excludes volatile food and energy [13]. The difference between the two is mainly due to energy, with gasoline and other factors acting as upward drivers [15]. NY crude oil was in the $88–$89 range as of October 2 [2].

• AI: The Bank of Japan cites “Middle East situation and crude oil prices,” “AI investment,” and “exchange rate fluctuations” as the three risks for upward pressure on prices [26]. In the market, capital demand associated with AI and data center investment is also pointed out as a factor for the rise in long-term interest rates [3].

• Supply and demand/Fiscal: Loosening supply and demand due to the massive issuance of government and corporate bonds, inflation concerns, and vigilance regarding fiscal deficits are weighing on bonds [27].

• Tariffs: In the materials referenced this time, the contribution of tariffs could not be confirmed numerically as a breakdown of CPI. I would like to be cautious about concluding that “tariffs are the main cause.”

As the author’s summary, not only the outlook for policy interest rates (short-term) but also the additional portion associated with supply and demand and fiscal policy (long-term risk premium) is having an effect, so even if rate hikes stop, long-term interest rates will not necessarily fall automatically. This is the biggest reason why it is difficult to guess the timing of buying and selling.

3. Basics of bond mutual fund price movements

The net asset value of a bond fund moves roughly according to the following formula:

1-year return ≈ Yield (interest income) – Duration × Interest rate increase

Duration is a measure of “how much the price will fall when interest rates rise by 1%,” and is a figure close to the remaining years to maturity [22]. For example, the effective duration of a representative ETF (AGG) that tracks the US aggregate bond market is 5.71 years, the average yield is 5.53%, and the 30-day SEC yield is 5.01% (as of September 28) [17]. It is calculated that if interest rates rise by 1 percentage point, the price will fall by approximately 5.7%.

What is important here is the difference between individual bonds and funds. Individual bonds return their face value if held until maturity, but bond funds do not have a maturity date because they continuously replace bonds. There is no fixed “when it will return,” so you need to think about it in terms of the relationship between the holding period and duration.

4. Confirming with performance: 2022 and 2026

Let’s look at what actually happened during past interest rate hike phases.

2022 was the year the Fed raised the policy interest rate at a rapid pace from near zero to over 4%, and the US aggregate bond index (Bloomberg U.S. Aggregate) was -13.0%, the worst year since statistics began [18][19]. The duration of the index at that time was around 6 years [18].

In October 2023, the US 10-year Treasury yield briefly reached 5%, but after that, buying flooded in and the yield fell [6]. This is an example where “5% was not necessarily the ceiling,” but conversely, it is also a phase where only those who guessed the ceiling profited.

In 2026, as of mid-September, the 10-year Treasury yield had risen by +0.76 percentage points year-to-date [7], and AGG’s year-to-date return is -2.7% (as of September 29) [20].

In Figure 3, the bar graph shows the annual return of the bond market, and the line graph shows the US 10-year Treasury yield (annual average). There are three points that can be read from this.

• Returns fall in years when yields rise: In 2022, the annual average yield of the 10-year Treasury rose by about 1.5 percentage points from 1.45% in 2021 to 2.95%, and the bond market was -13.0%. Conversely, in 2019 (2.91% → 2.14%) and 2020 (0.89%), when yields fell, they rose significantly by +8.7% and +7.5% [29].

• When the yield level is high, it is easier to return to positive: From 2023 to 2025, the annual average yield of the 10-year Treasury hovered around 4%, and the bond market was positive for three consecutive years at +5.5%, +1.7%, and +7.1% [19][29]. The high yield acted as an “interest cushion” to offset the price decline.

• In 2026, a “sharp rise in yields” and “high levels” are occurring simultaneously: The 10-year Treasury is 5.28% as of October 2 [30], and AGG is -2.7% year-to-date. The reason it has not collapsed significantly like in 2022 is thought to be because the yield at the start was high, and interest income is partially covering the price decline.

However, the line graph is an annual average and is not the “range of interest rate change” itself during the year. Depending on how interest rates moved within the year, the return can change even with the same average yield. Please view this only as a rough trend.

$$
begin{array}{|l|l|l|} hline
Period&Government bond yield movement&Bond market movement hline
2022&Fed policy rate from near zero to over 4%&US Aggregate Bond Index -13.0% (worst)
October 2023&US 10-year Treasury briefly 5%, then fell&Buying flooded in after the peak
Jan-Sep 2026&10-year Treasury +0.76%pt YTD (mid-Sep)&AGG -2.7% YTD (9/29) hline
end{array}
$$

5. Returns by scenario for the next year (estimate)

Using “Yield – Duration × Interest rate change,” I estimated the return if held for one year from now. I simplified the interest rate to change all at once after one year, and did not consider trust fees or exchange rates.

Looking at the total bond type, the break-even point is yield ÷ duration. It is 5.53% ÷ 5.71 ≒ 0.97 percentage points, and when calculated using the SEC yield of 5.01%, it is approximately 0.88 percentage points. In other words, until interest rates rise by about 0.9–1.0 percentage points in one year, the interest will offset the price decline.

On the other hand, for the long-term bond type (assuming a duration of 16 years), a 1 percentage point rise in interest rates results in a 1-year return of approximately -10%. Since the yield is in the 5% range, which is almost the same as the total bond type, it can be seen that the interest rate risk borne to earn the same interest is significantly different.

6. Even if interest rates rise, ‘time’ becomes an ally

Immediately after interest rates rise, the net asset value falls, but thereafter, operations continue at the new, higher yield. Assuming an AGG yield of 5.53% and a duration of 5.71 years, I calculated the cumulative return in the case where interest rates rise by 1 percentage point or 2 percentage points immediately and then remain unchanged.

In the trial calculation, the point at which it catches up (reverses) to the case where interest rates did not move is about 6.3 years later for a +1 percentage point rise, and about 6.5 years later for a +2 percentage point rise. This is slightly longer than the duration (5.7 years). Therefore, it can be said that for money where the planned holding period is clearly shorter than the duration, there is a possibility that the damage from rising interest rates cannot be fully recovered.

According to an analysis by an investment management company, in the US bond market since 1975, the coefficient of determination between the yield at the time of purchase and the annualized return up to 5 years later is as high as 0.90, and it is shown that when the yield at the time of purchase is at a level close to 5%, the 5-year annualized return also tends to be in the high 5% range [23]. The current yield in the 5% range is a historically not-bad starting point for those who hold for the long term. However, there is no guarantee that past relationships will continue in the future. Furthermore, Vanguard also indicates the view that even if the net asset value temporarily falls due to rising interest rates, the subsequent expected return increases [24].

7. Timing of purchase: Lump sum or installment?

The peak of interest rates can only be known after the fact. Therefore, a realistic method is to buy in stages over time. Assuming that a fund equivalent to AGG is used and standby funds are invested at 3.9% per year, I compared the performance based on how interest rates move over one year.

$$
begin{array}{|l|r|r|r|} hline
Interest rate scenario (1 year later)&Lump sum&3 installments&6 installments hline
Further rise (6.5%)&0.5%&1.7%&2.0%
Flat (5.5%)&5.7%&5.1%&4.9%
Decline (4.5%)&10.9%&8.5%&7.9% hline
end{array}
$$

While installment buying reduces the damage if interest rates continue to rise, the performance is inferior to a lump sum if interest rates fall. It is appropriate to view installment buying not as a method to increase expected returns, but as insurance to reduce ‘regret if you are wrong’. By dividing it into 3 to 6 times and deciding, for example, to execute it monthly or quarterly, you can prevent wavering in your judgment.

8. Timing of sale: Decide by ‘rules’, not by prediction

Selling by predicting the future of interest rates is a more difficult decision than buying. It is safer to limit considering a sale to when your own circumstances change as follows.

• You need the funds. Or the time you will use them has become shorter than the duration (for example, using them for a home purchase or education expenses within a few years).

• The fund’s investment policy or trust fee has changed.

• The ratio of bonds in the overall portfolio has become too large compared to the initial target (rebalancing).

Conversely, trading such as ‘selling once and buying back later because interest rates seem likely to rise further’ carries the risk of being unable to recover if there is a sudden reversal like in October 2023, because as mentioned earlier, predicting long-term interest rates is difficult.

9. Precautions for product selection: Duration, foreign exchange, distributions, and costs

Even among ‘bond mutual funds,’ price movements vary significantly depending on the contents.

$$
begin{array}{|l|l|l|l|} hline
Type&Duration Estimate&Impact on Price of +1%pt Interest Rate&Characteristics hline
Short-term Bond/MMF Type&Approx. 1-3 years&Approx. -1 to -3%&Small price movement, yield linked to policy rate
Aggregate Bond Type (AGG example)&5.71 years&Approx. -5.7%&Diversified into government bonds, corporate bonds, etc.
Long-term Government Bond Type&Example around 15 years&Approx. -15%&Maximum price increase when interest rates fall
High-Yield/Emerging Market Bond Type&Varies by product&Credit spreads affect in addition to interest rates&Tends to fall during economic downturns hline
end{array}
$$

Japanese individual investors should pay particular attention to the following points.

1. Presence or absence of currency hedging. Foreign bond funds without yen hedging will incur exchange losses if the yen appreciates. Given the history of coordinated intervention between Japan and the US (end of July), caution is required regarding exchange rate fluctuations [26]. On the other hand, funds with yen hedging can almost eliminate exchange rate risk, but they incur hedging costs. The short-term interest rate differential between Japan and the US (US FF median 3.875% – BOJ 1.25% ≈ approx. 2.6% points) is a guideline; in a simple calculation, a US bond yield of around 5.5% drops to around 3% after hedging, which is not much different from the Japanese 10-year government bond (3.09%) (actual costs fluctuate depending on the currency futures market).

$$
begin{array}{|l|l|l|l|} hline
Item&No Yen Hedge&With Yen Hedge&Domestic Bond Type hline
Exchange Risk&Yes (loss on yen appreciation)&Almost none&None
Impact on Yield&Depends on exchange rate&Hedge cost deducted (guideline approx. 2.6%pt)&JP 10yr 3.09%
Impact of Interest Rate Rise&Linked to US rates&Linked to US rates&Linked to Japanese rates hline
end{array}
$$

2. Whether it is a monthly distribution type. Since distributions are paid from net assets, the net asset value drops by that amount each time a distribution is made [25]. When combined with price drops due to rising interest rates, the perceived decline becomes significant.

3. Costs. The expense ratio of AGG is 0.03% [20], but for Japanese mutual funds, the trust fee varies greatly by product. For example, if you compare products with a trust fee of 0.8% per year and 0.1% per year, a difference of 0.7% points per year results in a difference of approximately 7% over 10 years in a simple calculation. Please check the prospectus before purchasing.

10. Trading decision flow and actions by scenario

$$
begin{array}{|l|l|l|} hline
Interest Rate Scenario&1st Year Estimate for Aggregate Bond Type&Basic Action hline
Further Rise (+1%pt)&Approx. -0.2% (including interest)&Continue holding if duration is long, increase purchases in installments
Flat&Approx. +5.5% (mostly interest portion)&Accumulate/hold as planned
Fall (-1%pt)&Approx. +11% (including interest)&Depends on purpose, consider partial profit-taking through rebalancing hline
end{array}
$$

11. Data to check from now on

Rather than trying to guess the outcome, it is realistic to check whether your ‘own rules’ have changed while looking at the following data.

• US Core CPI and Employment Statistics: These influence whether the FRB will implement additional interest rate hikes.

• Movements of 2-year and 10-year bonds: If the 2-year bond (policy rate outlook) falls but the 10-year bond does not, it is a sign that supply/demand or fiscal factors remain.

• Crude oil prices: This is the biggest factor creating the difference between headline CPI and core CPI.

• Supply and demand of US government bonds: This includes trends in the issuance of government and corporate bonds, and supply/demand measures such as buybacks by the Treasury Department.

• Yen exchange rate and Japan-US interest rate differential: In the case of no yen hedging, the exchange rate determines the net asset value.

Summary

• The price movement of a bond fund can be almost entirely explained by ‘yield – duration × interest rate change’.

• For an aggregate bond type, you can withstand interest rate increases of about 1% point in a year through interest income. Long-term bond types will fall by about 10% for the same interest rate increase.

• The guideline for the net asset value to recover after an interest rate hike is a little over 6 years, which is longer than the duration. For money you will use within a few years, go for short-term bonds.

• Rather than trying to guess the peak of interest rates, it is more realistic to buy in installments and sell only when your personal circumstances change.

• For Japanese investors, performance also varies significantly based on three factors: the presence or absence of currency hedging, the distribution method, and costs.

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Fact Check

We have verified the key facts and figures in this article using primary and secondary sources.

1. US 10-year Treasury yield exceeds 5% (9/14): The Nikkei reported an intraday high of 5.01% [5], while other reports stated 5.04% on the 15th, a level not seen since 2007 [8]. Based on closing prices (Treasury par yield), it was 4.97% on the 14th [27]. Note that the ‘5% breach’ was on an intraday basis, and there were days when it did not reach that level at the close. 〇

2. Recent yields (10/2): 10-year Treasury 5.271%, 2-year 4.825%, 30-year 5.620% (Minkabu, NY afternoon) [1]. The Nikkei market display shows 5.275% [28], a slight difference depending on the source. It also rose to 5.29% at one point on 9/29 [4]. 〇

3. FRB interest rate hike: A 25bp hike on 9/16 to 3.75–4.00%, unanimous [9][10]. The median year-end dot plot is 4.1% [10]. 〇

4. BOJ interest rate hike: To around 1.25% on 9/18, 7 in favor, 2 against [12]. Regarding the point of it being the ‘highest level in about 31 years,’ reports differ on whether the starting point is April or September 1995, so we avoided specifying the month in the text. △

5. US CPI (August): Headline 3.4%, core 2.4% [13]. Daiwa Institute of Research pointed out that the month-on-month core figure was pushed up by temporary factors related to mobile phone charges [14]. 〇

6. Background summary: Energy is the main upward driver [15], along with slack in supply and demand and fiscal concerns [27]. We avoided making a definitive statement because the contribution of tariffs could not be confirmed with figures in the materials referenced this time. △

7. AGG indicators (9/28): Effective duration 5.71 years, 30-day SEC yield 5.01%, average yield to maturity 5.53% [17]. However, the reference date for the average yield to maturity is not clear in the material and may be the end of August. Since interest rates have risen since September, the calculation is on the conservative side. △

8. -13.0% in 2022: Consistent across multiple sources [18][19][20]. Annual values for 2015–2018 are from secondary sources (index sites) only and have not been cross-checked. △

9. AGG year-to-date for 2026: -2.72% (9/29) [20], while another compilation shows -1.86% (9/23) [21]. Because differences arise depending on the compilation date and price basis, the 9/29 value was adopted for Figure 4. △

10. Starting yield and 5-year forward returns: R² 0.901, forecast of 5.61% annualized at a starting yield of 4.98% (analysis by asset management company, updated as of 2022) [23]. This is a historical statistical relationship and not a guarantee of the future. △

11. Figures in charts 3, 5, and 6: Author’s estimates (assuming interest rates change all at once, ignoring convexity, fees, and exchange rates). An illustration showing the mechanism, not a forecast. Long-term bond type with 16-year duration and short-term bond type with approximately 2-year duration are assumed values. 〇 (Calculations have been verified)

12. Hedge cost of approximately 2.6 percentage points: Author’s rough estimate based on the policy interest rate differential (3.875% – 1.25%). In reality, this fluctuates depending on the currency forward market. △

References

1. Minkabu ‘US Treasury yields generally rise, rebounding from the decline following US employment statistics = US Treasury market overview’ (2026/10/3)https://fx.minkabu.jp/news/380664

2. Minkabu ‘US 10-year Treasury yield starts around 5.18% = NY Bond Open’ (2026/10/2)https://fx.minkabu.jp/news/380629

3. Gaitame.com Money Education Channel ‘S&P 500 Outlook (10/2–10/9)’ (2026/10/2)https://gaitame.com/media/entry/2026/10/02/122339

4. Nikkei ‘NY Bonds, long-term bonds flat, 10-year Treasury yield 5.23%’ (2026/9/29)https://www.nikkei.com/article/DGXZQOFL29B8C0Z20C26A9000000/

5. Nikkei ‘US long-term interest rates in 5% range for first time in 2 years and 11 months, bond selling due to inflation and fiscal concerns’ (2026/9/14)https://www.nikkei.com/article/DGXZQOUB1188O0R10C26A9000000/

6. Bloomberg ‘US 10-year Treasury yield nears 5%, new risks for markets and the economy’ (2026/9/13)https://www.bloomberg.com/jp/news/articles/2026-09-13/TLBHU1R24U8200

7. Business Insider Japan ‘Why does a 5% US Treasury yield make investors tremble?’https://www.businessinsider.jp/article/2609-us-treasury-yield-5-percent-impact/

8. Yahoo! News Hiroyuki Kubota ‘US long-term interest rates break through 5%, what is the next milestone level?’https://news.yahoo.co.jp/expert/articles/f1617ef5d20e32a32012cc3a3be2bbfaac36434e

9. MUFG Focus USA ‘September FOMC: Raising policy rates for an earlier return to the 2% target’ (2026/9/16)https://www.bk.mufg.jp/report/whatsnew/MUFG-FOCUSUSAJ-09-16-2026.pdf

10. OANDA Securities ‘September FOMC Unanimously Decides on 0.25% Rate Hike for the First Time in About 3 Years’ https://www.oanda.jp/lab-education/market_news/fomc-sep-2026-review/

11. Sumitomo Mitsui DS Asset Management Ichikawa Report ‘September 2026 FOMC Review’ (2026/9/18) https://www.smd-am.co.jp/market/ichikawa/2026/09/irepo260918/

12. Newsweek Japan Edition (Reuters) ‘Bank of Japan Raises Policy Interest Rate to 1.25%’ (2026/9/18) https://www.newsweekjapan.jp/articles/-/334553

13. Kumamoto Nichinichi Shimbun (Kyodo News) ‘US August Prices Rise 3.4%, Growth Remains Flat’ (2026/9/11) https://kumanichi.com/articles/2035095

14. Daiwa Institute of Research ‘United States: Core CPI Exceeds Expectations Due to Surge in Mobile Phone Charges (August 2026)’ (2026/9/14) https://www.dlri.co.jp/report/macro/655066.html

15. Pictet ‘September FOMC and Subsequent Developments Expected from US August CPI’ (2026/9/14) https://www.pictet.co.jp/investment-information/market/today/20260914.html

16. Kabutore ’10-Year Government Bond Yield (All Periods) Long-Term Trend’ (As of 2026/10/1) https://www.kabutore.biz/keizaisihyo/sihyo_kokusai10.html

17. BlackRock ‘iShares Core U.S. Aggregate Bond ETF’ (As of 2026/9/28) https://www.blackrock.com/us/individual/products/239458/ishares-core-total-us-bond-market-etf

18. FEG ‘2023 Fixed Income Market Outlook’ https://www.feg.com/hubfs/FI Outlook 2023/2023 Fixed Income Market Oulook – FINAL.pdf

19. UpMyInterest ‘Bloomberg US Aggregate Bonds’ Annual Return List https://www.upmyinterest.com/bloomberg-us-aggregate-bonds/

20. Yahoo Finance ‘iShares Core U.S. Aggregate Bond ETF (AGG)’ https://finance.yahoo.com/quote/AGG/

21. Cbonds ‘AGG – iShares Core U.S. Aggregate Bond ETF’ https://cbonds.com/etf/51/

22. Russell Investments ‘Relationship between interest rate changes and bond prices’ https://russellinvestments.com/jp/insights/db-pension-investment/fixed-income/relationship-between-interest-rate-changes-and-bond-prices

23. Twenty Four Asset Management ‘Highest starting yields since ’08 predict strong five-year returns’ https://www.twentyfouram.com/insights/highest-starting-yields-since-08-predict-strong-five-year-returns

24. Vanguard ‘Near-term pain, long-term gain’ https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/near-term-pain-but-long-term-gain.html

25. Mitsubishi UFJ Asset Management ‘Monthly Report’ (Notes on the relationship between distributions and net asset value) https://www.am.mufg.jp/pdf/geppou/920894/920894_202212.pdf

26. Pictet ‘Key points of the BOJ July meeting and the unusual currency intervention during the period’ (2026/8/3) https://www.pictet.co.jp/investment-information/market/today/20260803.html

27. Zaikei Shimbun ‘US 10-year bond yield briefly exceeds 5%, highest level since 2023’ (2026/9/15) https://www.zaikei.co.jp/article/20260915/870050.html

28. Nikkei ‘US 10-Year Treasury’ market quote (as of 2026/10/3 2:19) https://www.nikkei.com/marketdata/quote/US10YT/

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