The bad news for bonds isn’t over. Far from it. Yet I’ll stick my neck out and say that for careful people with long horizons, this is a fine time to make selective purchases of high-quality bonds. That includes Treasuries, inflation-protected, corporate and municipal bonds, and bond funds. Today’s high interest rates are painful for borrowers. But at their current levels, they have begun to provide a comfortable buffer against further losses for investors and promise richer income streams for the future.
"With interest rates where they are now, it’s a good moment for long-term investors and for people in retirement to lock in some high yields," Kathy Jones, a bond maven who was formerly a chief strategist at Schwab, told me. Even so, jumping into bonds now requires fortitude because trouble is likely to continue. Interest rates, which soared in September, could easily rise from here, and their pernicious economic toll is still spreading. Nor is this just a U.S. problem. In France, a debt crisis is underway, raising concerns that it could worsen financial problems elsewhere in Europe and around the world.
A hot inflation report in the United States on Wednesday heightened expectations that the Federal Reserve will raise short-term rates again this year. It’s possible that longer-term rates set by thousands of traders in the bond market will rise, too. That means that bond buyers who sell before their bonds mature could face short-term losses. Still, months of rising rates have already led to a major and positive change for investors. The 10-year Treasury yield, which serves as a benchmark for all others in the bond world, surpassed 5.3 percent last month, up from 4.2 percent at the beginning of this year. It is hovering above 5 percent.
While that may seem shocking after rates were so low for so long, current yields are only approaching the average of 5.4 percent since the 1950s, based on my own computation of data compiled by Robert J. Shiller, the Yale economist. Investors are being compensated at rates that haven’t been available for years. These higher interest rates imply better returns for bondholders in the years ahead.
Source: New York Times Top Stories · Summarized by HeadlinesBriefing