KEY TAKEAWAYS
- Yields on 30-year U.S. Treasury bonds hit 5.3% recently, the highest level since 2007.
- That’s enticing for certain investors, but analysts caution against heavily investing in long-term bonds as risks including inflation, rising debt and uncertainty about Fed policy could create more market volatility.
- Shorter-term bonds offer competitive yields, making them a safer option for many investors.
Long-term bonds are paying more than they have in two decades, but analysts and wealth advisers caution against loading up on them amid lingering risks.
That’s not to say yields on the 30-year U.S. Treasury bonds aren’t enticing—investors can get paid more than 5% in interest to lend money to the U.S. government for three decades. That seemed almost unthinkable in 2020, when the bond market was so flooded with Federal Reserve support that the same bond paid less than 1.25%.
The yield on 30-year U.S. Treasury bonds hit 5.31% two weeks ago, its highest level since 2007 as investors dumped bonds across the world, thus forcing the Treasury to pay higher interest to keep its bonds attractive. Bond market wobbles are persisting as September begins, which could put more upward pressure on yields.
Some investors and analysts still don’t see long-term yields as high enough to compensate them for the risks ahead.
“I’m not sure at what level we would start to find it attractive … but we’re not getting enough of a yield pick-up,” said Michael McGowan, chief investment strategist at the wealth management firm Pathstone.
Why This Matters
Thirty-year Treasury yields above 5% look tempting, but advisers say inflation, federal debt and rate uncertainty could make shorter bonds more attractive.
Markets remain uncertain about the Fed outlook, rising federal debt levels, the Iran war’s impact on energy prices and questions over artificial intelligence’s impact on the economy.
It is a laundry list of uncertainties that investors say boosts the case for shorter-term securities—those that only saddle investors with risks for a few years or even less. It helps that the yield on shorter-term instruments isn’t too shabby either, with the 2-year U.S. Treasury note paying just under 4.4%, its highest level since early last year.
“We think that yields in short- and medium-duration fixed income are attractive, while long-end bonds are likely to stay volatile until inflation and growth show clearer signs of moderating, or until fiscal concerns are meaningfully addressed,” wrote Ulrike Hoffmann-Burchardi, chief investment officer for the Americas at the Swiss bank UBS, in a note to clients.
Portfolio Dependent
Whether to buy more long-term bonds depends on each investor’s time horizon, need for emergency cash, and willingness to sacrifice likely higher returns over time in riskier stock markets, wealth advisers caution.
Some nearing retirement, for example, may find higher-yielding long bonds appealing. That’s because it would guarantee them over 5% interest payments for 30 years, effectively free of repayment risk since markets view the U.S. government as exceedingly unlikely to default.
Then again, soon-to-be-retirees may already be quite stuffed with bonds and have little extra cash to buy new ones.
Other investors who’ve been holding onto cash may want to deploy that stockpile into bonds, said Cal Spranger, a fixed-income specialist at Badgley Phelps Wealth Managers in Seattle. But any bond-buying should tie back to a person’s long-term financial plant, he said.
Some investors may suddenly find that, thanks to booming stock markets over the last few years, they are more exposed to equities than they planned. Trimming their red-hot equity exposures was a tougher pill to swallow when long-term bonds paid only 3%.
“That’s not all that exciting to some people, but at 4% or 5%, it’s a little better,” he said.
The Case For Buying
The answer to whether to start buying more bonds “depends on what your needs are,” said Lance Roberts, chief investment strategist at RIA Advisors in Houston. But for some, there’s quite a strong case for doing so.
“If I were looking at retirement today and creating income, this is the best opportunity we’ve had in 20 years to buy bonds at 5.2%, 5.3%,” Roberts said.
Long-term yields may still rise, meaning investors could, in theory, have waited for a better buying opportunity. But if yields do rise, investors can use any interest income they earn from buying bonds today to buy new ones later on.
And at some point, the economy will likely stumble if yields go too much higher.
“If interest rates go from 5% to 6% or 7%, you’re going to crack the economy, and when that happens, you get into a recession, and interest rates fall during a recessionary environment,” Roberts said.
With the economy in trouble, the Fed would likely be forced to slash interest rates and potentially buy bonds of its own—the strategy it undertook in 2008 and 2020. And long-term bond yields could fall to ultra-low levels yet again, making a 5%-yielding bond that investors picked up look quite attractive.
What to Keep in Mind
The flip side is that a 5%-yielding bond looks less attractive if yields keep going higher. More pressure in bond markets could force governments and corporations to pay higher yields to investors when they borrow.
That would mean more red on investors’ screens for bond allocations. The pressure isn’t forever, since investors who hold onto their bonds can recoup their full value once the bond contract expires. But buying a 30-year bond means the date is much further out, and if you need to sell for some reason you may do so at a loss.
It also hampers investors’ ability to buy other assets that may well fetch them higher returns.
“Yes, they’re more attractive,” Pathstone’s McGowan said. “Are they attractive enough to warrant a significantly larger allocation of the portfolio? … For us, the answer is still no on that front, at least not in a meaningful way.”