A top-performing manager adding duration near the highs is a notable contrarian signal for Treasuries, though he still allows for yields to overshoot by another 10 to 15 basis points before peaking. His case rests on the Fed’s hiking path slowing growth, so any sign that energy-driven inflation forces the central bank to go further would test it. For oil, the link runs both ways: Iran-war energy prices helped drive the bond selloff, and a renewed crude spike would add to inflation pressure and delay any rally in yields. Widening spreads for weaker corporate and sovereign borrowers suggest tighter financial conditions are starting to bite.---After a decade on the sidelines, one of Wall Street’s best-performing bond managers says yields near 5.4% now pay investors enough to bet that the Fed will break growth before it breaks the bond market.Summary:Morgan Stanley Investment Management’s Vishal Khanduja has turned bullish on US debt for the first time in more than a decadeThe roughly $4 billion Eaton Vance Total Return Bond Fund raised duration to around 6.1 years, above its benchmark’s 5.8, its first overweight in over ten yearsThe 10-year Treasury yield has risen about a percentage point since June to a 24-year high near 5.4%Khanduja expects the hawkish Fed, which hiked last month and signalled more to come, to slow growth and cap yields, though he sees a possible further 10 to 15 basis point overshootBloomberg data show 10-year yields would need to reach around 6% within a year before losses outweigh incomeThe fund has returned close to 3% a year over a decade, beating 97% of peers, but is down close to 3% this yearA veteran bond investor at Morgan Stanley Investment Management has turned bullish on US government debt for the first time in more than a decade, arguing that yields near two-decade highs now offer enough income to absorb further losses and will eventually weigh on economic growth. Vishal Khanduja spoke in an interview with Bloomberg.Khanduja, who co-manages the roughly $4 billion Eaton Vance Total Return Bond Fund with Brian Ellis, said the fund lifted its duration, a measure of sensitivity to interest-rate moves, to around 6.1 years as of June. That compares with about 5.8 years for its benchmark, the Bloomberg US Aggregate Bond Index, and marks the fund’s first overweight duration position in more than ten years. The fund has returned close to 3% a year over the past decade, more than double its benchmark, and outperformed 97% of its Morningstar peers over that period, though it is down close to 3% this year, roughly in line with the index.His shift comes after a punishing stretch for fixed income. Elevated energy prices linked to the Iran war, a resilient US economy, heavy government borrowing and a wave of corporate debt issuance to fund artificial intelligence spending have combined to push the 10-year Treasury yield up by about a percentage point since June, to a 24-year high near 5.4% on Wednesday. Khanduja acknowledged the selloff could overshoot by a further 10 to 15 basis points, but said the firm was adding exposure gradually and described his 12-month conviction as very high.Central to his view is the Federal Reserve, which raised rates last month for the first time in three years and signalled further increases. Khanduja characterised the central bank as a bond vigilante in its own right, arguing that its determination to contain inflation will slow growth and ultimately cap yields. He pointed to early signs of strain in wider credit spreads for lower-rated companies and some sovereign borrowers, including France, as well as pressure on lower-income consumers and leveraged firms.The arithmetic also favours buyers, in his view. According to Bloomberg data, investors buying 10-year Treasuries at current levels would need yields to climb to around 6% over the next year before price losses outweighed their income. Khanduja said valuations had become very attractive, while noting that the market is still waiting for a clear catalyst to spark a rally, leaving the timing of any turn dependent on evidence that higher borrowing costs are slowing the economy. This article was written by Eamonn Sheridan at investinglive.com.