Navigating the Bond Market Rollercoaster: Increasing Exposure to Long-Term Treasurys

As the stock market experiences turbulence due to rising bond yields, financial experts advise everyday investors to adapt by enhancing their exposure to longer-term Treasurys and other fixed income investments. However, it is crucial for investors to fully comprehend the implications of these actions.

The allure of higher yields has captivated many individuals since the Federal Reserve began increasing its benchmark interest rate in March 2022. High-yield savings accounts, certificates of deposit, and money market-mutual funds have emerged as appealing avenues for capital accumulation. These products often offer rates ranging from 4% to 5%.

Moreover, Treasury bills with shorter maturities have also showcased their potential in generating yield. Yields on T-bills BX:TMUBMUSD06M spanning different timeframes have surpassed 5%, a notable increase from approximately 4.5% at the year’s inception.

Despite these attractive opportunities, recent developments in yields have sparked anxiety among investors. The rapid ascent of long-term Treasury yields and subsequent bond market sell-off have significantly impacted the stock market for an extended period.

However, financial experts argue that purchasing longer-term Treasurys is a viable strategy for those looking to make their cash work harder. Naturally, investors must grasp both the advantages and risks associated with bonds in times of fluctuating interest rates.

According to wealth adviser Marisa Bradbury, managing director of Sigma Investment Counselors’ Florida offices, “Moving from cash to fixed income is the right move right now. You can definitely lock in some decent rates we haven’t seen in a long time.” Bradbury emphasizes how fixed income investments are no longer solely focused on principal protection; they now offer the potential for substantial income as well.

Matt Sommer, the head of specialist consulting group at Janus Henderson Investors, believes that recent developments present a unique opportunity for fixed income investments. He states, “The upside to what’s happened is for savers. There’s never really been such an attractive opportunity for fixed income investments as there is now.”

In light of the market’s current volatility, increasing exposure to longer-term Treasurys appears to be a path worth exploring. However, investors must approach these strategies with a comprehensive understanding of the associated risks and rewards.

The ‘Barbell’ Approach

As financial advisors, it is crucial to guide clients in making informed investment decisions, especially during times of market volatility. While some may be inclined to solely focus on Treasury bills, we recommend adopting a “barbell” approach to diversify their portfolio. This strategy involves incorporating longer-term Treasurys and fixed income investments.

Richard Steinberg, the Chief Market Strategist at The Colony Group, emphasizes that investors should not underestimate the importance of considering the longer end of the yield curve. Instead of hibernating on the short end, he advises clients to extend the duration of their Treasury and fixed income holdings.

In recent times, yields have experienced an upward trend following a stronger than anticipated September jobs report. The yield on the two-year Treasury note BX:TMUBMUSD02Y has risen to nearly 5.1%, compared to 5.023% on Thursday afternoon and 4.26% a year ago.

Similarly, the yield on the ten-year Treasury note BX:TMUBMUSD10Y has climbed to 4.86%, up from 4.715% on Thursday afternoon and 3.82% from a year ago. Additionally, the yield on the 30-year bond BX:TMUBMUSD30Y has reached 5.01%, surpassing the 4.88% from Thursday and 3.78% from a year ago. These figures indicate the highest levels since August 2007.

It is important to remember that bond prices and yields move in opposing directions. When interest rates rise, bond prices tend to decrease while yields increase. Conversely, when rates fall, prices rise and yields decrease. This serves as a cautionary reminder for investors.

In anticipation of further interest rate hikes by the Federal Reserve, David Sekera, Chief U.S. Market Strategist at Morningstar, suggests that investors should brace themselves for potential losses. However, at present, he believes it is an opportune time for bond portfolios to strengthen their long-side investments. This shift is partly influenced by the reallocation of funds from the stock market to fixed income.

Related: Why Financial Markets Are Affected by Rising Treasury Yields