Bonds are back in fashion just weeks after a historic rout. Here's why fixed-income is suddenly luring in hordes of investors – including Warren Buffett.

• Bond prices have slumped since the onset of the pandemic in one of the worst routs in market history.
• But Treasurys staged a comeback in recent weeks, with worries about the Fed's rate hikes fading.

Wall Street thought 2023 would be "the year of the bond" – and while that's yet to come about, the past few weeks have finally brought some good news for fixed income after a nightmarish run since the start of the pandemic.

US Treasury prices have staged a mini-comeback, and benchmark 10-year yields have started to cool off after spiking to a 16-year high of 5% in mid-October.

Meanwhile, big-name investors – including Warren Buffett and Stanley Druckenmiller – warmed up on shorter-duration bills over the third quarter, in another sign the rout could be coming to an end.

Historic collapse

There are several different ways to check the strength of the bond market – but whichever gauge you choose, it's clearly been a rough few years for Treasurys.

BlackRock's iShares 20+ Year Treasury Bond ETF, which trades under the ticker TLT and tracks longer-duration government debt prices, has nearly halved since March 2020, when COVID-19 first hit the US.

Bond yields – which move in the opposite direction to prices – also spiked in that period, with 2-, 10-, and 30-year Treasury yields all jumping past 5%.

But the market has finally showed signs of life in recent weeks.

TLT is up 6% since mid-October – meaning its racked up similar returns to the benchmark S&P 500 stock index – while 10-year Treasury yields have fallen back 40 basis points since topping 5%.

'Something for everyone'

Investor hopes that the Federal Reserve is close to winding down its war on inflation — after a 525-basis point increase in interest rates since early 2022 — is one factor that's supporting bond prices.

The central bank is still signaling it could hold rates high well into 2024 in a bid to quell price pressures.

But the October jobs report, which showed that unemployment ticked up slightly, has boosted the market's confidence that the Fed is done lifting borrowing costs. Just 1-in-10 traders now expect further hikes, according to the CME Group's Fedwatch tool.

Bond prices tend to climb when interest rates are flat or falling, as their fixed returns become more appealing to investors.

Juicier Treasury yields are also likely luring in traders seeking so-called "safe-haven" assets, amid concerns about a potential US recession and geopolitical volatility in the Middle East, despite the American economy's strong recent growth.

"There's something for almost everyone to do in the bond market today, right now," PIMCO's CIO for non-traditional strategies Marc Seidner said in a commentary published Oct. 27.

"Whether you have a risky portfolio and you're trying to hedge against possible left tail or negative economic scenarios, the starting point of a 4.6%, 10-year treasury note potentially gives you a lot of downside protection if economies turn into a more negative scenario, like we expect, or even a more nefarious type of scenario," he added.

Big-name buyers

Some of Wall Street's highest-profile names loaded up on fixed income last quarter.

Warren Buffett's Berkshire Hathaway grew its mountain of Treasury bills by 30% to $126 billion over the three months ending September 30, according to an earnings report published last weekend.

Meanwhile, billionaire investor Stanley Druckenmiller recently said he'd built a "massive" bullish position in 2-year notes, citing his fear that the US economy could soon start to slow.

It's not just billionaire investors who are moving back into bonds, either.

The same BlackRock fund that's tumbled 46% since the start of the pandemic has also been the hottest-selling ETF of all of 2023, according to data from Morningstar.

"Investors have swarmed this fund to lock in attractive bond yields before the Fed reverses course and cuts interest rates," Ryan Jackson, an analyst for the investment firm, said in a recent note.