Bonds are sometimes an overlooked asset class. They don’t have the allure of quick, sizable gains that stocks do, but they also don’t have the volatility seen in equities.
Bonds are essentially loans that the purchaser makes to the government, corporations, or municipalities when they need capital. The principal is paid out at a maturity date determined when the product is purchased, and the bond accrues modest interest over that period.
However, investing in the treasury market requires patience and a long-term financial plan. 2022 saw the worst bond performance in several decades, as the continued interest rate hikes hurt bond prices.
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Typically, interest rate cuts drive the price of bonds up, decreasing the yield of bonds.
We spoke with Carley Garner, author, strategist, and senior commodity broker, to discuss how investing in bonds can enhance your investment portfolio and why investors should consider buying them before the next anticipated interest rate cut.
Bonds offer predictability during uncertain times
Experts note that despite the September interest rate cut, rates are still historically high compared to the last two decades. This provides a window for curious investors to consider entering the treasury market, particularly high-quality bonds that offer modest returns with much lower volatility.
Short-term yields are expected to decrease faster than long-term yields in the coming months, making bonds a safer and more appealing option. Garner highlights that bonds' long-term maturity can act as an alternative for investors.
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“I've been around for a while — I've lived through the financial crisis,” she said. “I'm seeing a lot of red flags on the tape that remind me of 2007 and 2008. So what I've done with my personal portfolio is I've allocated a very big percentage of it towards treasuries as a safety play.”
Garner notes the importance of the 10-year Treasury Yield, the interest rate the government pays to borrow money for an entire decade. This measurement serves as an indicator for other interest rates and economic conditions.
“I believe that at this point, depending on your timing, the 10-year Treasury note you can get is anywhere from 4% to 5%,” she continued. “You get paid to wait — you get that 4% to 5% regardless of what happens in the markets.”
“If you hold all the way to expiration, there is some interest rate risk between now and expiration, but if your time horizon is long enough, you get paid to wait and see what happens.”
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Treasuries are a defensive investment strategy
Garner explains that treasuries are an excellent product for risk-averse investors.
“Let's say we go into a recession. Not only are you getting 4% or 5% to wait in your treasuries, but you're probably getting some appreciation for those as well,” she said. “So I think there's definitely a place for bonds, specifically treasuries, not necessarily riskier corporate bonds, but treasuries.”
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“We've got a wild election season coming up,” she said. “We've got financial markets that are a little disjointed, and perhaps we have a soft landing, and everything goes perfectly. But perhaps not.”
Garner notes that treasuries are a great way to protect your portfolio from volatility—as long as you understand the maturity timelines. However, the outcome of the 2024 Presidential Election and potential future interest rate cuts may influence investors to reassess their portfolio asset allocation.
“I think it's time to play defense, not offense,” she said. “That's what I'm doing personally. So, I've even gone beyond the 60/40 portfolio and allocated far more than that to treasuries. I'm not saying you should necessarily do that — I'm just saying it's time to be cautious.”
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