Bonds have stumbled big-time this year amid raging inflation and interest-rate increases by the Federal Reserve.
The Bloomberg Aggregate Bond index has dropped 15% year to date, a huge move for the fixed-income market.
That decline presents a buying opportunity, according to famed bond investor Jeff Gundlach, chief executive of DoubleLine.
“The U.S. Treasury Bond market is rallying tonight,” he wrote on Twitter Sept. 26. “[It’s] been a long time. I have been a buyer recently.”
He noted that the prices of bond exchange-traded funds iShares iBoxx Investment Grade Corporate Bond ETF LQD and iShares J.P. Morgan USD Emerging Markets Bond ETF EMB are now lower than they were at the depths of the “covid panic” in March 2020.
You might consider buying bonds too. With the Fed having raised interest rates by 3 percentage points since March, short-term yields have exploded higher.
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Treasury Yields
One-year Treasuries yield 4.28%, two-year Treasuries yield 4.34% and three-year Treasuries yield 4.42% at last check. That compares to yields of 0.09%, 0.31% and 0.56% respectively a year ago.
Treasury securities carry virtually no risk, as they’re backed by the federal government. And if you hold the paper until maturity, you don’t have to worry about price fluctuation for the bond. You’ll almost certainly receive your full principal back.
Investment-grade corporate bonds also are fairly safe. A three-year double A-plus-rated Apple bond recently yielded 4.59%. And a three-year single A-minus Morgan Stanley bond yielded 5.21%.
You can set up an asset allocation strategy to determine how much bonds you want to buy. The standard weightings are 60% stocks and 40% bonds. People younger than 40 can often go much higher than that weighting for stocks. And older people can often go higher than that weighting for bonds.
Bonds are particularly useful if stocks suffer an extended period of losses, such as 1929-54 and 1966 to 1982. But given the 23% slide by the S&P 500 so far this year, you can argue that stocks are a good buy now too.
Bond Ladder
It’s a good idea to mix the maturities of your bonds. That way, if yields go up, you’ll be able to take advantage, reinvesting the proceeds of your maturing bonds into new, higher-yielding ones.
And if yields fall, you’ll continue to receive the old, higher rates on your bonds with longer maturities. You can “ladder” your maturities, say from three months to five years.
At this point, you might not want to go beyond maturities of five years. That’s because the yield curve is inverted, meaning short-term rates are higher than long-term rates. The 10-year Treasury recently yielded 3.96%, lower than all the yields for shorter maturities cited above.
Before investing in stocks or bonds, make sure you have enough cash reserves to cover six to 12 months of spending in case of an emergency, such as losing your job. You can stash these reserves in a money-market account yielding over 2%.
