Bond yields have been surging. How income-hungry investors can cash in
A jump in Treasury yields rattled the bond market this week, but the volatility comes with a silver lining for income-seeking investors: An opportunity to boost portfolio income has arrived. A volatile combination of inflation fears and higher oil prices lifted the 10-year Treasury yield to a high of 4.687% on Tuesday – its highest level dating back to January 2025. The rate on the 30-year Treasury surpassed 5.197% for its highest level since July 2007. Bond yields and prices move in opposite directions, meaning that as yields surged, the value of the issues slid. But those falling prices also provide a window for buying income-generating assets at a discount. “As much as bond investors don’t like higher yields because it ends up resulting in cheaper bond prices, these are really attractive all-in yields we are seeing today,” said Paul Olmsted, principal, fixed income strategies at Morningstar. Short term time horizons The runup in yields has the pleasant side effect of boosting income for investors socking money away in safer assets for shorter time horizons. Yields on money market funds, certificates of deposit and Treasury bills are well off their highs and have been cooling in recent years in anticipation of rate cuts from the Federal Reserve. “With rates dropping over the past year, people were worried that their safe yield was disappearing,” said Barry Glassman, certified financial planner and founder of Glassman Wealth Services in Vienna, Virginia. “If you were disappointed you couldn’t lock in 4%-plus yields on safer investments – things like CDs and Treasurys – they’re back,” he said. Investors with a more conservative bend can also consider laddering CDs or Treasurys, meaning they’re making a portfolio of staggered maturities, Glassman said. As each instrument matures, the investor can reinvest the proceeds into new bonds – reinvesting at higher rates should yields continue their upward march. Intermediate duration bonds Investors with a longer-term time horizon likely want to bring in intermediate duration bonds – that is, bonds with maturities in the range of five to 10 years. “You get less exposure to the longer-term, term-premium oriented risk we see flaring up in the markets today, but also more durable income versus being in cash or very short-term securities,” said Rebecca Venter, Vanguard’s senior fixed income client portfolio manager. Intermediate duration is a sweet spot for investors with lengthier time horizons: These bonds don’t have the same price sensitivity as longer-dated issues. Further, unlike the shortest-duration bonds, they can see price appreciation in a falling rate environment. The Vanguard Core Bond ETF (VCRB) has a 30-day SEC yield of 4.7% and an expense ratio of 0.1%. The fund has an average duration of 5.8 years. There is also the Vanguard Core-Plus Bond ETF (VPLS) for investors who don’t mind adding some exposure to emerging markets debt and taking a little more risk. The fund has a 30-day SEC yield of 4.74% and an expense ratio of 0.2%. Venter said that while the shakeup in bonds this week may feel like a ghost of 2022 – when bond prices swooned as the Fed began its rate-hiking cycle – the circumstances are different. “For a lot of investors, if they’re investing in core fixed income, you’re getting a starting yield of 4% to 5% – that’s a much different starting point versus the 1% to 2% you would get in 2022,” she said. Today’s higher yields offer bond investors some cushion when prices tumble, Venter said. Taking measured risk Opportunities may also emerge for investors who are shopping in the high-yield bond sector. High-yield bonds are still offering yields exceeding 7%, according to Morningstar’s Olmsted. “Looking at those yields, it’s pretty attractive, but how can investors take advantage of this?” he said. “It goes to how you complement your high-quality core with more income.” Investors hoping to tap the high-yield market would do best to outsource that to a fund manager, Olmsted said. “I think this is a great market for active managers,” he said. “I think that where yields and interest rates are provides that opportunity for higher income, but be cautious in how much credit risk you take.”
