As the yield on the 10-year U.S. Treasury surpassed 5% for the first time in 19 years, Wall Street heavyweights are divided on how to respond.

While heads of major bond management firms like BlackRock and PIMCO view this as an opportune time to invest in bonds, Ray Dalio, the "godfather of hedge funds," warned of a debt crisis and advised avoiding interest-rate-sensitive assets.

The Wall Street Journal (WSJ) consulted six prominent Wall Street asset managers on how to cope with the surge in yields, coming as the 10-year Treasury yield hit 5.241% on September 28 (local time)—its highest level since June 2007—and the 30-year yield reached 5.561%, the highest since June 2002.

Rick Rieder, Global Chief Investment Officer of Fixed Income at BlackRock, which oversees more than $2 trillion in assets, said, "My funds are generating yields of over 7% with a 3-year duration. I've been waiting 40 years for an opportunity like this."

Noting that historical periods when the 10-year yield exceeded 5% were followed by strong 12-month returns, he added, "The question is whether today is the day to enter."

His answer is a cautious "yes."

Rieder stated that despite losses this year, investors wanting to talk about bonds have increased "explosively," and he has begun "gradually" adding long-term bonds, whose prices rise when interest rates fall.

Dan Ivascyn, CIO of PIMCO, the world's largest bond manager, noted that while signs of weakness are appearing in interest-rate-sensitive sectors such as housing, many consumers have locked in low-rate mortgages and investments by AI companies are continuing. "We expect a certain degree of slowdown, but not a recession," he said.

He evaluated that it is possible to "build a high-quality bond portfolio yielding 6% to 7%," making it more advantageous than overvalued stocks.

He also projected that over the long term, AI investments will enhance economic efficiency, curb inflation, and support bond prices.

Brian Whelan, TCW's CIO for Fixed Income, also said, "More than half of U.S. growth is coming from borrowers who are not sensitive to interest rates. The war will end, and commodity prices will come down."

He pointed to the fact that bond fund capital has not fled despite this year's losses as a positive sign, and expects the rate-hike cycle will not last long.

On the other hand, Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund, pointed out that the U.S. is spending over $1 trillion (approx. 1,356 trillion won) annually just on debt interest, and the burden of principal and interest payments has begun to "crowd out" other government spending.

Dalio, who previously warned of the dangers of surging government debt in his book Principles for Navigating Big Debt Crises, added that this phenomenon is also appearing in other Western nations.

He warned that bond supply will overwhelm demand, causing global bond yields to continue rising, which will ultimately slow down borrowing and growth.

Accordingly, he recommended diversification while avoiding assets sensitive to interest rates.

Rob Arnott, founder of Syzygy Asset Management, said the key is when war-induced inflation will end, noting, "Trump wants people to believe the war will end soon, but there is little evidence to support that."

He diagnosed, "We are looking at a bubble right now."

Given the extreme valuation gap between S&P 500 companies and the next 500 largest companies, he expects small- and mid-cap stocks to outperform large-cap stocks—which surged amid the AI craze—over the next few years.

Sonal Desai, Global CIO of Fixed Income at Franklin Templeton, said, "I do not believe high interest rates will break the economy," but expects yields to rise further as government borrowing and AI infrastructure investments compete for capital.

She advised that investors should focus on securing "stable interest income" as the "bond market re-evaluates the capacity of the U.S. economy."

Desai stated that while avoiding ultra-long-term bonds that are vulnerable to additional Federal Reserve hikes, she is considering purchasing corporate bonds of AI hyperscalers such as Microsoft, Meta, Amazon, and Alphabet.

(Photo: AP, Yonhap News)