While stocks get clobbered by rising bond yields, financial experts say everyday investors can roll with the punches by increasing their exposure to longer-term Treasurys and other fixed income — so long as they understand what they are doing.
Yield — and more of it — has been a great-sounding idea for more people ever since the Federal Reserve started increasing its benchmark interest rate in March 2022.
High-yield savings accounts, certificates of deposit and money market-mutual funds have all become alluring ways to reap rewards for parking cash. It’s easy to find these products with rates in the 4% and 5% range.
Treasury bills, which come due within a year, have also been a yield-producing place to put cash. Yields on T-bills
of varying length are over 5%, up from roughly 4.5% around the start of the year.
“High-yield savings accounts, certificates of deposit and money market-mutual funds have all become alluring ways to reap rewards for parking cash. ”
Yet yields have been inducing anxiety lately. For well over a month, the speedy ascent of yields for longer-term Treasury debt and a bond market sell-off have been knocking the stock market for a loop.
Still, some financial experts say there’s nothing wrong with buying longer-term Treasurys for the person who wants to keep putting their cash to work. Of course, they need to understand the risks and rewards for bonds when interest rates rise and fall.
Also see: As Treasury yields rise, Wall Street wonders what the Fed will do next. Where should you park your extra cash?
“Moving from cash to fixed income is the right move right now,” said wealth adviser Marisa Bradbury, managing director of the Florida offices for Sigma Investment Counselors. “You can definitely lock in some decent rates we haven’t seen in a long time.”
“Before, fixed income was so much a principal protection piece of the portfolio. Now you can actually earn a decent income on it too,” she said.
“The upside to what’s happened is for savers,” said Matt Sommer, head of specialist consulting group at Janus Henderson Investors. “There’s never really been such an attractive opportunity for fixed income investments as there is now.”
To be sure, there was a time when Treasury yields where far above their current mark. In the early to mid-1980s, the yields on the 10-year Treasury note and 30-year Treasury bond exceeded 10%. Of course, Sommer and other financial planners are focused on the present and the future because that’s what financial planning is all about. Here’s what they are thinking:
The ‘barbell’ approach
When clients building their nest egg want to go all in on T-bills, Sommer is instead advising they use a “barbell” approach that adds a mix of longer-term Treasurys and fixed income too.
“This is exactly the time investors shouldn’t hibernate on the short end of the (yield) curve,” said Richard Steinberg, chief market strategist and a principal at The Colony Group, a wealth advisory firm. He’s also advising clients to extend their duration on their Treasury and fixed income investments.
Yields climbed again Friday morning after the stronger than expected September jobs report. The yield on the two-year Treasury note
rose to almost 5.1%, up from 5.023% Thursday afternoon and up from 4.26% a year ago.
The yield on the ten-year Treasury note
climbed to 4.86%, up from 4.715% Thursday afternoon, and up from 3.82% a year ago. The yield on the 30-year bond
reached 5.01%, up from 4.88% on Thursday and up from 3.78% a year ago – heading Friday morning for the highest level since August 2007.
Bond yield and price always move in different directions. When interest rates rise, bond prices decrease and bond yields increase. When rates fall, prices increase and yields decrease. That’s where the note of caution comes in.
Brace for losses if the Fed keeps increasing interest rates, said David Sekera, chief U.S. market strategist at Morningstar, the investment research firm.
For now, it may be a good time for bond portfolios to beef up the long side. “Part of what we are seeing in the stock market is a reallocation out of stocks and into fixed income,” he said.
Related: Why rising Treasury yields are upsetting financial markets
Treasury yields are climbing: ‘There’s never really been such an attractive opportunity for fixed-income investments’