Resisting the siren song of short-term Treasurys is proving tough for some.
When Uncle Sam is willing to pay more than 5% on short-term Treasurys, it can be difficult for investors to think about diversifying their fixed-income portfolios.
The Federal Reserve’s rate-hiking campaign means that investors don’t have to take too much risk to be handsomely compensated on their cash. Consider that as the S&P 500 dropped 1.8% in August, investors put $11 billion into bond ETFs that month – of which $8 billion went into ultra-short duration government bond funds, according to data from State Street Global Advisors.
But what will it take to encourage investors to buy up longer-dated bonds and lock in some of those higher rates? Though we are a long way from interest rate cuts, at some point the Fed will see fit to dial back its policy stance – and that could subject investors to reinvestment risk.
“We have been talking to people about not chasing the short end [of the yield curve] too much,” said Jerrod Pearce, certified financial planner and partner at Creative Planning. “Now is the best time in a long time to be buying more intermediate-term bonds.”
Whether it’s time to diversify in fixed income, including adding longer-dated issues, will depend on an individual’s goals and the plan he or she drafted with a financial advisor.
“The strategy really depends on the client: Are you going to experience FOMO if bond funds are up 8% and you’re stuck at a 5.5% Treasury bill rate?” asked Crystal Cox, CFP and senior vice president at Wealthspire Advisors. “The question is where do we see rates going from here, and this is an ever-changing almost daily discussion among professionals.”