The 10-year yield on bonds has jumped to 2.9%, and as stocks tumble amid inflation woes, many individual investors are taking advantage of the higher interest payments offered by Treasury Securities.
This year to date, the S&P 500 has dropped 14 percent, mostly due to inflation reaching 7.9% in February, the highest mark since January 1982, according to Trading Economics, and is where the stock tumble began.
Some analysts are predicting that by the end of this quarter, US inflation could reach 8.5%. It’s not far off the mark, as it has climbed to 8.3% as of the end of April 2022, according to CNBC.
And of course, the consumer price index (CPI) number of inflation isn’t a complete real-world reflection of what consumers are paying or how different sectors of the economy are being affected. For example, export prices are up 152.70%, import prices are up 141.90%, and producer price change has climbed 10%. A major problem for consumers and businesses alike is that energy inflation is 25.55% and food inflation is 7.9%.
Other factors currently hurting the stock market are the ongoing supply chain problem, the recent Federal Reserve rate hike, and its announcement that more increases are coming. Slowing economic growth, a decline in globalization, and the war in Ukraine are all having an impact. Many experts say the current negatives in the stock market outweigh the positives.
Individual investors have started moving toward treasury bonds as yields have increased, hitting their highest levels since 2018. This year, the 10-year yield rose 1.39 percentage points to its current 2.9%. The amount is down slightly, from peak yields of 3.17% on May 9. Nonetheless, yields are higher than they were, and with the security treasury bonds offer, they can be a smart move.
Treasury bonds are generally considered one of the safest investments as the US government isn’t likely to default on its debt, thus you are practically guaranteed to receive the par value of your bond if you hold them until they mature.
If the Federal Reserve raises interest rates it could push down the value of your bonds. To counter that, investors typically use what is known as a “ladder strategy” that allows you to take maturing bonds and reinvest that money in new bonds that pay higher yields. Conversely, if yields go down, your older bonds will take advantage of the higher rates from before.
Experts advise using the “ladder strategy,” a method of purchasing separate individual bonds that have a range of maturities, according to The Street. This can be likened to a “diversified” portfolio of individual bonds, where you don’t tie up all of your investment cash in a single area or investment.
For example maturities of:
-Three-year Treasuries, recently had a yield of 2.85%
-Five-year Treasuries, recently had a yield of 2.95%
-Seven-year Treasuries, recently had a yield of 2.97%
-10-year Treasuries, recently had a yield of 2.93%
If you’re worried about tying up your money for years, there are short-term treasuries you can take advantage of as well. Naturally, these have lower yields. A short-term ladder may look something like this…
-Three-month Treasuries, recently had a yield of 1.31%;
-Six-month Treasuries, recently had a yield of 1.61%;
-Nine-month Treasuries, recently had a yield of 1.93%; and,
-One-year Treasuries, recently had a yield of 2.22%.