Should you buy bonds when interest rates are high?
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
Waiting for the Fed to cut rates before considering longer term bonds isn't our preferred approach. The bond market is forward-looking and long-term Treasury yields typically decline once investors believe that rate cuts are coming.
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
I bonds' rates have since dipped from their headline-grabbing heights—they were as high as 9.62% in May of 2022—to 5.27% for the current crop. That rate may still look attractive, but I bonds' variable rates—combined with their five-year lockup period—may give you pause.
Bond prices are inversely rated to interest rates. Inflation causes interest rates to rise, leading to a decrease in value of existing bonds. During times of high inflation, bonds yielding fixed interest rates tend to be less attractive.
Starting yields, potential rate cuts and a return to contrasting performance for stocks and bonds could mean an attractive environment for fixed income in 2024.
However, you can also buy and sell bonds on the secondary market. After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.
As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.
Stocks and bonds deliver positive returns and cash underperforms both as the Fed pivots to rate cuts. Stocks and bonds may both be poised for success in 2024. Easing inflation and a pivoting Fed should reduce headwinds that have faced both asset classes in recent years.
When interest rates rise, prices of existing bonds tend to fall, even though the coupon rates remain constant, and yields go up. Conversely, when interest rates fall, prices of existing bonds tend to rise, their coupon remains constant – and yields go down.
Are I bonds better than CDs?
If you're investing for the long term, a U.S. savings bond is a good choice. The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases. If you're saving for the short term, a CD offers greater flexibility than a savings bond.
Variable interest rates are a risk you can't discount when you buy an I bond, and it's not like you can just sell the bond when the rate falls. You're locked in for the first year, unable to sell at all.
Interest on I bonds is exempt from state and local taxes but taxed at the federal level at ordinary income-tax rates.
1. High-yield savings accounts. Overview: A high-yield savings account at a bank or credit union is a good alternative to holding cash in a checking account, which typically pays very little interest on your deposit. The bank will pay interest in a savings account on a regular basis.
- Equities. Equities generally offer a reliable haven during inflationary times. ...
- Real Estate. Real estate is another tried-and-true inflationary hedge. ...
- Commodities (Non-Gold) ...
- Treasury Inflation-Protected Securities (TIPS) ...
- Savings Bonds. ...
- Gold.
- Stocks. Stocks have historically outpaced inflation—annualized returns have averaged about 10% historically. ...
- Inflation-protected bonds. ...
- Real estate. ...
- Diversify your investments. ...
- Explore bond laddering or CD laddering.
You can choose from more than 100 Vanguard bond funds or a variety of bond funds of your choice.
The United States 1 Year Government Bond Yield is expected to be 5.023% by the end of September 2024.
2024 Investment Outlook
U.S. Treasury yields have trended higher in 2024. Yields on the benchmark 10-year U.S. Treasury started the year below 4%, but in early April moved above 4.5%. Bonds in the current environment appear to offer investors more attractive long-term opportunities.
In a recession, investors often turn to bonds, particularly government bonds, as safer investments. The shift from stocks to bonds can increase bond prices, reduce portfolio volatility, and provide a predictable income. However, drawbacks include lower yield potential, default risks, and interest rate risks.
Is it better to buy bonds when interest rates are high or low?
Key Takeaways. Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
Even if the stock market crashes, you aren't likely to see your bond investments take large hits. However, businesses that have been hard hit by the crash may have a difficult time repaying their bonds.
| ETF | Expense ratio | Yield to maturity |
|---|---|---|
| SPDR Portfolio Corporate Bond ETF (SPBO) | 0.03% | 5.5% |
| JPMorgan Ultra-Short Income ETF (JPST) | 0.18% | 5.5% |
| iShares 7-10 Year Treasury Bond ETF (IEF) | 0.15% | 4.4% |
| iShares 10-20 Year Treasury Bond ETF (TLH) | 0.15% | 4.6% |
The United States 5 Years Government Bond Yield is expected to be 4.751% by the end of September 2024.
Long-term bonds have an average maturity of 10 years or longer, making them a better choice when interest rates are falling, as they're expected to do in 2024.
