Is Now the Time for Treasuries? Should We Allocate for ‘Higher For Longer’?
The Federal Reserve’s J. Powell just signaled we should expect “higher for longer” as inflation continues to be stubborn. Is now the time to benefit from a higher interest rate?
We’ve had an unexpected ride in the treasuries market in the past six months, and as with any series of ups and downs, there are always opportunities.
The yield on the benchmark 10-year Treasury note plunged from 5% in late October to 3.78% near 2023 year-end as the Fed begun indicating they were likely to start cutting short-term rates in 2024. However, a selloff in bonds has emerged as the Fed continues fighting inflation, with the US 10-year Treasury now yielding 4.6% (as of this posting).
For bond investors, these conditions are nearly ideal as the yields remain very compelling. After all, most of a bond’s return over time comes from its yield and falling yields (which I expect in the latter half of 2024) boost bond prices.
Mixed Signals
The US economy has presented Wall Street with a challenge as the economy’s momentum earlier this year was stronger than what the Street was expecting. Despite – or perhaps more aptly put – because of this, the Fed does’t expect to lower rates “until it has gained greater confidence that inflation is moving sustainably toward 2%,” they said in a released statement.
I however, believe other factors could contribute to lower rates by year-end. A couple years of falling real income have consumers navigating a financial tightrope and the safety net of a robust labor market may be the only things between a move towards recession. If massive corporate layoffs continue and the hiring throughout retail and service sectors slows, we could be in store for some anxious moments for investors paying attention throughout the remainder of 2024.
Not Your Grandpa’s Treasuries?
Whether you’re inclined to listen to the Fed’s guidance of lower rates later in 2024, or see the possibility of a slowing economy, investors might consider locking in higher, longer-term interest rates while they last.
During the past two years, many investors have watched yields surge on low-risk certificate of deposits (CDs), short-term bonds, and money market mutual funds and they have found they could earn nearly five percent on their money without the ups and downs that come with investing in stocks.
Simply put, today’s rates offer a chance to lock in rates not seen in quite some time. Should you stay in cash, or is it time to look at longer-term ways to help meet your investment needs with longer maturity bonds and fixed interest instruments? If the Fed stays where they are for longer than we expected, or if they actually have room to go higher, we could see a slowing U.S. economy. Which in turn would likely put pressure on interest rates to come down.
What do you think? Are treasuries playing an increasing part of your portfolio? Email me at michael@wise-assets.com to hear more!