As you’re surely aware, stocks have hit the skids this year, with the S&P 500 dropping 14% year to date, thanks to roaring inflation, soaring bond yields and the war in Ukraine.
But the jump in yields has drawn individual investors to Treasury bonds. Treasury yields have hit their highest levels since 2018. The 10-year yield this year has jumped 1.39 percentage points to 2.9%. It reached a peak of 3.17% on May 9.
So investors are jumping in to take advantage of the higher interest payments. During the four-week period ended May 25, investors sent a net $20 billion into mutual and exchange-traded funds that concentrate on ordinary Treasurys, according to Refinitiv Lipper, as cited by The Wall Street Journal.
That represents the largest four-week commitment in the 29 years of Refinitiv Lipper data. The funds have seen net inflow of $52 billion so far this year.
Strategy: Individual Bonds on a Ladder
If you’re thinking of buying Treasurys, you might want to consider individual bonds rather than mutual funds and ETFs. You can generally purchase individual Treasurys easily at major brokerages.
The advantage of individual Treasurys is that if you hold them until they mature, you’re almost guaranteed to receive the par value of your bond. The U.S. government is extremely unlikely to default on its debt. Meanwhile, more interest-rate hikes by the Federal Reserve could well push down the value of bond funds further.
To be sure, if bond yields keep rising, you’ll be stuck with the same interest income that prevailed when you bought your bonds. And bond fund payouts would be buoyed, as the funds replace maturing bonds with new ones that have higher yields.
You can set up a ladder of individual bonds with a range of maturities. That means you aren’t trying to time the market with a single maturity. Each time a bond matures, you can replace it with one that has the longest maturity on your ladder.
This strategy means that if yields go up, your new bonds will let you take advantage of that. And if yields slide, your older bonds will enable you to enjoy the higher rates from before.
You might create a ladder with:
· Three-year Treasuries, which recently yielded 2.85%;
· Five-year Treasuries, which recently yielded 2.95%;
· Seven-year Treasuries, which recently yielded 2.97%; and,
· 10-year Treasuries, which recently yielded 2.93%.
Perhaps you have a shorter time horizon, with the possibility that you’ll want/need to spend at least some of your money devoted to bonds in the next year or two. In that case, you can set up a ladder of short-term Treasuries. This might include:
· Three-month Treasuries, which recently yielded 1.31%;
· Six-month Treasuries, which recently yielded 1.61%;
· Nine-month Treasuries, which recently yielded 1.93%; and,
· One-year Treasuries, which recently yields 2.22%.
