Charles Schwab Recommended Adding This Asset to Your Portfolio for Better Returns — Should You Still Do It?
A year ago, with inflation surging and the Federal Reserve set to initiate a set of interest rate hikes to help tame it, Charles Schwab analysts said you might benefit from moving money into the long-term bond market.
As SmartAsset reported at the time, yield curve trends indicated a coming peak in yields, supporting the recommendation to buy long-term bonds. Even though Schwab noted that there might still be pricing risk if inflation continued to rise, the risk then was offset somewhat by the Fed’s tightening efforts.
A year later, inflation has finally begun to move lower and the Fed’s rate hikes have eased, at least somewhat. Meanwhile, Schwab’s own exposure to bonds — it held about $28 billion in bond losses on paper at the end of 2022 — pulled it into the recent financial crisis that first hit Silicon Valley Bank, The New York Times reported.
As the NYT noted, the bond losses were tied to rapidly rising interest rates. Many financial institutions held long-term bonds with low interest rates, which made them less attractive amid a rise in new bonds with higher interest rates.
“The Federal Reserve raised rates more than they have in 40 years. That caused massive losses inside of bonds,” Robert Gilliland, managing director at Concenture Wealth Management, told CNBC. “It’s important to understand that bonds are generally secure, but not necessarily safe.”
Does that mean you should shy away from long-term bonds now?
Not necessarily.
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Because of what happened in 2022, bonds now offer more attractive interest payments to investors. Six-month Treasury bonds currently pay an interest rate of 4.985%, according to CNBC — well up from 1.188% a year ago.
And because the Fed raised interest rates so high and so fast in 2022, many experts expect the central bank to slow its pace considerably this year.
That doesn’t mean you should start moving great sums of money into bonds — especially if your portfolio is heavily geared toward stocks. But if your investment plan already includes a bond allocation, you might consider moving to longer-dated bonds, according to Derek Pszenny, cofounder of Carolina Wealth Management.
The reason is that bonds with longer maturities are usually more sensitive to moves in interest rates. If the Fed begins decreasing interest rates, long-term bonds will be the biggest beneficiaries, Pszenny told CNBC.
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