Let’s Talk Bonds: Use a Telescope, not a Microscope
February 11, 2022There are a lot of headlines about interest rates rising and many will say something along the lines of “Highest rates since 2020!” or “Rates Jump to Highest Levels; Mortgage Rates Climbing!” Couple those headlines with the fact that the 10-year bond yield just moved up to 2%, a somewhat psychological level. There are fears that rates will rise even further and so fast that the economy will slow dramatically at time when it still is somewhat on edge. Adding those to the headline inflation numbers and there is a fair amount of angst.
So, what do you do in times like this? Remember to grab a telescope, instead of a microscope.
A microscope might show this picture: We’ve circled approximate times in the last 5 years when the 10 year treasury yield was at 2% and then underlined the lows of interest rates over the last year. Bottomline is that rates couldn’t go any lower and it looks like rates have climbed to high levels.
Source: Yahoo Finance
If we extend out the time period to 20 years, the picture is a bit different and you can see just how low rates have been for years.
Source: FRED: https://fred.stlouisfed.org/
We don’t know how much rates will rise and the news can feel unnerving at times. What we can say is that rates are still historically low and there is a lot of distance between 2%-3% now and where rates were 10, 15 20 years ago. We also know the importance of focusing on 4 key areas: shorter duration, diversification, solid income, high credit quality. In times like these, when the headlines are designed to create anxiety, we will continue to go back to these fundamentals.
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