Rising interest rates mean one thing for investors—bonds are back in favor, according to an InspereX “Advisor Pulse Survey” released today.

The 384 advisors surveyed believe rates have peaked for two-year Treasurys at about 4.7%, but they believe the 10-year Treasury has room to push even higher than its current approximate rate of 4.2%, the survey showed.

“The rising rate environment has meant one thing for fixed-income markets: Bonds are back and once again at the forefront of the asset allocation discussion,” said John Tolar, head of fixed income sales and trading for InspereX, in a statement. “We saw bond sales reach 10-year highs in both October and November.”

InspereX is an underwriter and distributor of fixed income and market-linked products to more than 1,500 broker-dealers, institutions, asset managers, RIAs, and banks based in Delray Beach, Fla.

According to the survey, 62% of advisors believe rates on the two-year U.S. Treasury are at a peak now. “They do not believe the same for the 10-year bond, suggesting the inverted yield curve may be coming to an end: 34% believe 10-year rates have peaked, 24% expect rates to hit 5%, while 31% expect them to hit 6%,” InspereX said.

According to the financial advisors surveyed, higher-yielding fixed income has had a positive impact on their businesses. More than two-thirds said their clients are moving some of their equity allocation into fixed income and an almost equal percentage said the higher rates have made their conversations with clients more positive.

“It’s refreshing to see advisors express optimism within fixed-income markets moving forward, as they’re forecasting an end to the prolonged inversion of the yield curve,” Tolar said. “Interestingly, in last year’s survey, 74% of advisors said they expected the inverted yield curve to continue into the second quarter of 2023.”

According to the survey, advisors and their clients have a long list of concerns, including the top one for both groups, which is the global geopolitical climate. At the same time, market volatility, a potential recession, rising interest rates and the U.S. political divide also are front-of-mind.

The top three reasons advisors said they are using individual bonds in client portfolios are because it helps customize portfolios, it shows the advisors’ value-add to the clients, and it helps improve overall performance.

“As [higher] bond yields have returned to the market, advisors have acted on the opportunities to secure income for their clients and insulate portfolios from potential broad market drawdowns and the near certainty of heightened market volatility in the coming year. The growing likelihood of the higher-for-longer environment has also been especially beneficial for their bottom lines,” Tolar said.

The relationship between advisors and their clients is continuing to gain importance, the survey said. Fifty-seven percent of advisors said their relationship with clients is their biggest competitive advantage. Only 7% said the portfolio performance is the most important characteristic.

At the same time, advisors are concerned about some client behaviors. Too many clients are influenced by what they read and hear from the investment media; think short term rather than long term; or have expectations of the market that are unrealistically high.