In recent weeks, interest rates have been front and center for market participants.
The chart below shows the Treasury yield curve in June, August, and September. The yield curve illustrates the interest rates investors can earn on U.S. Treasury securities across different maturities. As you can see, rates have risen across the board, with particularly significant increases in the 3 to 5 year range. At the longer end, the 20 and 30 year rates are inverted, meaning the 20-year Treasury currently offers a higher yield than the 30-year.
While most of the world has historically viewed higher interest rates negatively, I see an attractive opportunity for investors looking to buy bonds. Depending on the maturity, investors can now earn roughly 0.32% to 0.40% more per year than they could three months ago.
ETF, Mutual Funds or Direct Bond Buying
When deciding how to buy bonds for a portfolio, I have always tended to favor buying them directly.
When an investor owns bonds through an ETF or mutual fund, there is always the risk that the fund declines in value and never fully recoups that loss. With an individual bond, such as a U.S. Treasury, the price can certainly fluctuate along the way; however, if the investor holds the bond to maturity, they receive the bond’s maturity value.
For example, if an investor buys a 10-year Treasury bond with a 4.9% yield to maturity and holds it until maturity, the yield to maturity provides a 4.9% annualized return, assuming the bond is held to maturity.
So, how do we buy these bonds?
If you have read one of my many previous articles on interest rates, you know that I frequently reference the Charles Schwab Yield Matrix. Schwab makes the process fairly straightforward: the type of bond is listed in the left column, the bond’s duration runs across the top, and Schwab provides the corresponding interest rate or yield to maturity.
Heads I Win, Tails You Lose!
What looks especially attractive to me right now is the 20-year Treasury yield of 5.49%. Not only is it the highest yield on the curve, but it is also unusually high relative to the 30-year rate. That inversion makes the 20-year particularly interesting to me. In addition, this yield is as high as it has been since before the Great Financial Crisis.
This may be oversimplifying it, but I would be very comfortable holding a 20-year Treasury bond for the full twenty years, regardless of what happens to its price along the way, and receiving 5.49% per year. If rates move lower, I have the potential to sell the bond at a higher price; if they move higher, I am still earning the 5.49% yield I locked in.
For me, that is what makes the current interest rate environment so interesting. We can earn an attractive yield today while still having the potential for additional upside if rates move lower.
Moore Invested Disclosure
Advisory Services offered by Arkadios Wealth. Moore Invested and Arkadios are not affiliated through any ownership.
Past performance does not guarantee nor is indicative of future results. This summary of statistics, price, and quotes has been obtained from sources believed to be reliable but is not necessarily complete and cannot be guaranteed. All securities may lose value, may not be insured by any federal agency and are subject to availability and price changes. Market risk is a consideration if sold prior to maturity. Information and opinions herein are for general informational use only and subject to change without notice.
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