It's Time to Get Out of Short-Term Bonds. Where to Park Your Cash Now. -- Barrons.com

Dow Jones09-23

Karishma Vanjani

The bond market is sending a message. The era of parking money in short-term fixed-income investments is over.

Short-term rates were flat, or 0.2 basis points down, this week at 3.573% while longer rates, as measured by the benchmark 10-year Treasury yield, ended up 7.8 basis points higher at 3.727%. (One basis point is equal to one one-hundredth of a percentage point.)

That has meant the two-year and 10-year yield curve, which maps the difference in returns offered on the longer term versus the short-term debt, has taken off. The differential has risen each day this week, closing at 13.7 basis points and 15.3 basis points on Thursday and Friday, respectively, which are the highest levels since June 2022.

In the fixed income world, this is what they call a 'bear steepener.' It's a sign of increased uncertainty or risk perception among investors, who in turn are demanding a higher yield or premium to lend to the U.S. government for a long period, such as 10 years.

The relative easing on the two-year Treasury yield is a result of the Federal Reserve lowering near-term rates by 50 basis points this week, while officials, including Fed Gov. Christopher Waller see "a lot of room to move down [further] over the next six to 12 months."

This means shorter-term rates are likely to move lower in 2024. And that is a big blow to the 'T-bill and Chill' strategy, which gained popularity last year as investors bought risk-free government debt maturing in four weeks to a year, yielding over 5%.

The latest 26-week bill auctioned on Monday gave investors 4.410% as its highest yield. They will have to accept even lower rates during next week's auctions. Yields on all six Treasury bills -- one year, six month, four month, three month, two month, and one month -- are now down for the week while some are at their lowest levels in roughly two years, Tradeweb data show.

In turn, those elevated money-market fund returns, which invest in short-term products, will also trend lower from here.

"It remains a good time for investors who are overweight cash or very short-term bonds relative to their long-term target fixed income allocations to consider moving out the curve," Rebecca Venter, Senior Fixed Income Product Manager at Vanguard told Barron's.

Moving out the curve doesn't always mean going all out and buying 20- or 30-year Treasury bonds. Investors can target the middle ground for now, while keeping some positions in shorter-term bonds for near-term liquidity. Exchange-traded funds such as the Vanguard Total Bond Market ETF, which exposes investors to intermediate securities with maturities of more than a year, are one option.

Do-it-yourself investors can also make their own duration bets, says Eric Lutton, chief investment officer at Sound Income Strategies. Smaller ETF providers have options -- such as the BondBloxx Bloomberg Three Year Target Duration U.S. Treasury and BondBloxx Bloomberg Five Year Target Duration U.S. Treasury funds -- but they can be much less liquid with millions in assets as opposed to Vanguard's billions.

Investors can also just go to Treasury.com and buy new notes and bonds before next week's auctions of two-years, five-years, and seven- years. Brokerages, like Fidelity, provide access to Treasuries already in circulation.

As we move into year end, investors can swap out into even longer maturities, especially as yields on the 10-year find their top range. BTIG's Jonathan Krinsky sees a 3.9%-4% yield on the 10-year. Alex Morris at F/m Investments calls for an yield between 3.75% and 4%.

As the market approaches this expected " premium" -- whatever that may be -- the risk of buying long-term bonds decreases. This means there is less chance of bond prices to fall, so investors are less likely to lose money if they need to sell, or take paper losses while they hold the bonds until maturity. (Remember, yields and bond prices move in opposite directions.)

"The obvious implication is that the curve will grind steeper from here -- especially the benchmark 2s/10s spread," Ian Lyngen, U.S. rates strategist at BMO Capital Markets.

Choose wisely.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

 

(END) Dow Jones Newswires

September 23, 2024 03:00 ET (07:00 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap
Leave a comment