Bond Investors: Yields Are Good

The Bond Investor’s New Mantra

Don’t allow perfect to be the enemy of good. Voltaire, the French writer and philosopher, is commonly thought to have made this important point first. Though he probably wasn’t referencing the bond market, his thinking is appropriate at this point in the current cycle: There’s no need for investors to wait for prices to hit their lows and yields (which move inversely) to hit their peak. Yields are good today.

Yes, the journey for bond investors in 2022 has been disappointing—to say the least. And some investors may be having a “never again” moment when it comes to buying more bonds. I think that’s a mistake.

Higher inflation and policy challenges to it have resulted in significantly higher yields for bonds of all shapes and sizes. What’s caught my eye in particular are the yields on high-quality, short-maturity U.S. government guaranteed bonds.

Ordinarily, investors expect to earn a higher rate of return when purchasing a bond with a five-year maturity as opposed to one with a two-year maturity. The longer you commit to lending money (buying bonds), the greater the interest you should expect to earn. Not so today. The table below, comparing rates today vs. a year ago, shows that shorter-maturity government bonds currently offer higher yields than longer maturities do.

Source: Bloomberg.

This flip has to do with expectations for economic growth (a separate discussion we can have in the future). The bottom line is that you don’t need to lock your money up for very long to earn a high rate of interest on triple-A-rated securities.

And if you’re concerned about “losing” money in bonds, don’t be. Bonds are a contract, and that contract (typically) says you’ll get the face value of your bond back on the maturity date. So, unless there is a default—and I’m not worried about the U.S. government defaulting on its debt—your money is coming back to you. And with short-maturity bonds, your money comes back to you sooner rather than later.

I know that Federal Reserve policymakers aren’t done raising interest rates just yet. The inflation battle has yet to be won. So, I’m not suggesting loading up on bonds all at once. What I’m suggesting is that investors begin building or rebuilding their bond portfolios now because short-maturity U.S. government guaranteed bonds are offering us attractive levels—which is something special.

We may not be at the market bottom, but there’s good value out there right now. Don’t allow perfect (trying to time the absolute highest yield) to be the enemy of good (solid short-term rates today). Sitting in cash is no longer the best option. As my mother used to tell me, “You can do better.”

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