Stories
Income Investors: Capitalize on Rising Bond Yields Amidst Market Volatility
- •Rising bond yields, with the 10-year Treasury hitting 2007 highs and the 30-year reaching 2004 highs, present unique opportunities for income investors.
- •Experts like Rebecca Venter from Vanguard suggest investors are in a much better position now than a year ago due to higher starting yields, offering a more balanced outlook for future returns.
- •To mitigate interest rate risk, investors should focus on shorter-duration bonds (up to five years), with Treasury bills being the safest, and investment-grade corporates offering higher yields.
- •Floating-rate corporates (1-3 years) and floating-rate bank loans are attractive options, providing yields that adjust with rising rates and minimal interest rate risk.
- •For a "sweet spot" between volatility and income, Omar Aguilar of Schwab Asset Management and Leslie Falconio of UBS Americas recommend investment-grade corporates in the five- to seven-year part of the curve, advising incremental position building.
Key Questions Answered
Bond yields have climbed as traders contend with the federal debt and deficit, higher oil prices, stubborn economic strength, and ongoing inflation. In response, the central bank hiked its benchmark interest rate by a quarter percentage point, with markets pricing in another potential increase at its upcoming meeting.
Long-dated bonds experience pronounced volatility and greater duration, making their prices highly sensitive to interest rate fluctuations. Experts advise sticking to shorter durations of up to five years, short-term investment-grade corporate bonds, or floating-rate options to minimize interest rate risk while capturing attractive yields.
Many strategists consider the five- to seven-year part of the curve to be the "sweet spot" for investment-grade corporate bonds and credit assets due to strong corporate fundamentals. Experts recommend building these positions incrementally rather than jumping in all at once to secure longer-term income and build a cushion against potential rate hikes.
