While more sanguine investors bought the dip, helping to buoy the U.S. stock market, some of those who are risk-averse retreated to safety, temporarily pumping up the U.S. government bond market.
In the days following the Russian invasion of Ukraine, yields on the benchmark 10-year Treasury note fell before resuming their march upward again. Declining yields typically mean prices are up and there is demand for Treasuries while rising yields indicate the opposite. If anything, the past two weeks have been a tug-of-war between investors’ desire for a safe haven and their concerns about inflation.
For most retail investors—including those with retirement on the horizon—I don't see how adding U.S. government bonds makes much sense right now. If it’s security you’re after, you might as well stick with a federally insured high-yield savings account or the like. And if you want more income-like returns, then you would be better off considering other parts of the bond market, such as corporate debt.
Even though it’s common sense, the first thing to keep in mind bears repeating: Don't let headlines dictate your investing decisions. You shouldn’t pull money from the stock market and put it into bonds as a temporary harbor because you can’t stomach the recent volatility. If that’s the case, you probably shouldn’t have been invested in equities to the extent you were in the first place. And you’ll likely end up paying for it.
“Without exception, I’ve never had anyone get back into the stock market at a lower price than when they got out,” says Dale Brown, who has worked as a portfolio manager and fixed income specialist at Salem Investment Counselors for more than 30 years.
Still, if you just can’t handle the equity market’s ups and downs, or you want a secure place to stash extra cash, a high-yield savings or credit union account, or money market fund—with government insurance—might just be easier than investing in government bonds or a government bond fund. Sure, the yields are stingier (about 0.65% compared with 1.7% for a 2-year Treasury bond and 2% for a 10-year Treasury bond), but remember, you aren’t really investing in any of the above for the money. It’s strictly a protection play.
For those who want more than just safekeeping from their bonds, the outlook for U.S. Treasuries is pretty dim. Even with the geopolitical situation, most economists expect inflation to persist and the Federal Reserve to stay the course with interest rate increases this year. That will move Treasury bond prices lower.
A key number is 3%, according to Jim Paulsen, chief investment strategist at the Leuthold Group. Paulsen’s research shows that when 10-year Treasury bond yields have been above that level, bonds ensure there is less volatility in a portfolio, but they don’t reduce returns all that much. When they’re below 3%, investors wind up leaving too much on the table in terms of returns (14 percentage points a year based on stock-market returns from 1926 to 2021) for the reduction in risk.
If you’re at least 20 years away from retirement, there is really no reason to be allocating money to low-yielding Treasury bonds. But if you’re closer, say five or so years out, it’s natural to want to put more money into fixed income since it provides just that—steady income. But there are better options than Treasuries that will likely provide better payouts with just a bit more risk.
Certain corporate bonds with slightly lower credit ratings are better buys than 10-year or more Treasuries, says James Gartland, a senior portfolio manager at Neuberger Berman.