[the_ad id="21475"]
[ad_1]
Short-term Treasury bills have garnered investors’ attention as yields pop amid the Federal Reserve’s rate hiking campaign – and debt ceiling tensions in Washington. Now, however, might be a good time to start shopping for longer-term bonds. That’s because, if the Fed begins dialing back its policy stance, investors who snap up longer-dated issues can lock in higher yields. Piling into shorter-term T-bills – which was especially tempting as the yield on the 1-month note touched 6% earlier this week – subjects investors to reinvestment risk if rates come down. “If an investor moves from longer duration to shorter duration to take advantage of yield, you lose a little diversification, but where’s the value on the yield curve?” said Paul Olmsted, senior manager research analyst on the fixed income team at Morningstar. “Over the long term, it probably makes sense to move out from short to longer duration purely because we haven’t seen these yields in a long time.” US5Y YTD mountain Yield on 5-year U.S. Treasury Indeed, the rate on the 5-year Treasury was at 3.9% on Friday morning, while the yield on the benchmark 10-year was 3.8%. This doesn’t necessarily mean it’s time to cut bait on your short-term bond holdings, however. Here’s what you should consider before revisiting your fixed-income sleeve. Duration and diversification Duration is a measurement of a bond’s interest rate sensitivity, and it’s based on yield, maturity and other factors. Issues with longer duration are likely to see greater price fluctuation in response to changes in interest rates – that means when rates rise, their prices fall more sharply. Bonds’ prices move inversely to yields. Investors were thrown for a loop in 2022 as equities and bond prices tanked at the same time. The inverted yield curve also resulted in higher yields for short-term issues, but sharp price declines. However, as interest rates and the yield curve normalize, you could see lower long-term yields. “It means you have better price appreciation on your bonds over that time,” said Olmsted. “If yields fall, you see some of that appreciation, which you don’t get if you’re on the shorter-end of the yield curve.” By diversifying the duration of your bond holdings, you’re prepared for the expected change in interest policy. That might help the fixed income side of your portfolio avoid sharp swings. Some financial advisors are taking this opportunity to build out holdings in intermediate-term bonds. This can mean…
Click Here to Read the Full Original Article at Investing…
[ad_2]
[the_ad id="21476"]