A Bond Yield Table Makes It Clear Which Duration You Must Choose

Let me share what a bond yield table is, how to read it, and what bond duration you must choose.

Hopefully, everybody has been building a CD Step Stool or a Bond Step Stool (not a ladder). A Step Stool is the smarter approach because the short end of the yield curve has been rising faster than the long end.

The Fed Funds rate is the shortest of the short end, given it is the overnight interbank lending rate. The idea is that the more the Fed Funds rate increases, the higher yields should rise for longer duration lending rates due to the time value of money. With inflations expectations up, interest rates should continue to inch higher.

But the market controls longer term lending rates, and the market is currently telling the Fed to bugger off. Investors have found comfort in longer term bonds because their risk appetite has diminished. They don't see inflation on the horizon nor do they see rosy good times.

To understand why buying shorter duration bonds and certificates of deposits is the optimal financial move for your cash, let's take a look at a simple bond yield table.

Bond Yield Table Shows Why Shorter Is Better

First of all, can we give a moment of thanks now that we can generate a reasonable return on our cash? We've been able to grow our net worths tremendously since the 2008 – 2009 financial crisis. Now we get to protect our net worths with higher guaranteed rates. Pinch me silly!

The key is to create multi-generational wealth so that our kids never have to work again. With no student loans after college and one of our many fine homes to inhabit for free, their lives will be set. We just need to make sure we never tell them how wealthy we really are, lest they turn into insufferable early retiree bloggers.

Take a look at this bond yield table. You will see that riskier bonds pay more at every duration and longer durations pay higher yields than shorter durations.

A bond yield table makes it clear which duration you must choose to invest
Source: Fidelity bond yield table

Let's zero in on U.S. Treasury bonds, the safest of the safest bonds you can buy. Here's a tutorial on how to buy Treasury bonds. Unless you think the United States is going to default on its debt obligations, you will get your money back. Remember, the United States can simply print more money.

Based on the chart, you can lock your money up for one year and get a 2.74% return, state tax free.  Alternatively, for 0.18% more, you can lock your money up for 10 years and get 2.92%. The 10-year bond yield is usually considered the risk-free rate of return, but the reality is that any of these Treasury bond durations can be considered the risk-free rate of return.

You would have to be a moron to tie your money up for 10 years for such a tiny premium.

And you would be a fool to own a 3-year or 5-year bond when you can own a 2-year bond with the same yield. Ok, not only morons and fools buy long duration bonds. So do extremely rich people who will never run out of money or institutional bond traders.

None of us can accurately predict where will we be 10 years from now. You might move for a job or want to buy a house during this time period. Some of us might even be dead, which would be such a waste of money. Further, even a slight uptick in inflation several years from now will wipe away any real returns you may have.

The savvy investor's best move is to build a Bond Step Stool consisting of only 12-month duration bonds or shorter. For example, every month you can purchase a 6-month bond yielding 2.55%. After six months, you will always have liquidity to reinvest every month.

When the Fed is in the process of raising rates, you'll maximize your cash returns because you'll be able to more quickly take advantage with shorter lockups. The value of optionality increases in a rising interest rate environment full of uncertainty. When the Fed is in the process of lowering rates, you want to own longer duration bonds with higher yields to delay the inevitable drop.

Cash Is Growing More Attractive

It is my hope the yield curve (10-year minus 2-year bond or shorter) does not invert, even though the 5-year minus 2-year curve already has. An inversion would likely bring a recession within 12 – 18 months if history is any guide. Instead, I hope the yield curve slightly steepens so that equities don't have to face such a huge headwind and the return on cash can continue to increase.

Inverted Yield Curve Between 5-Year and 3-Year Treasury Bond

You've got to ask yourself after making so much money since the financial crisis: Does the peace of mind that comes with earning 2.5% – 3% risk-free outweigh the benefits of potentially making 10% or losing 10% in the stock market?

If the answer is yes, then overweight bonds or cash in your public investment portfolio. If not, then overweight equities and get accustomed to volatility and potentially losing money. It will help if you use real numbers.

Let's say you have a $1,000,000 portfolio using the above return assumptions. You must compare earning $25,000 – $30,000 from your portfolio risk-free versus making $100,000 or losing $100,000. Is the extra $70,000 – $75,000 worth the risk of potentially losing $100,000? Only you can decide.

I would be surprised if the S&P 500 can make a 10% annual return any time over the next five years. A more reasonable return assumption is probably closer to +/- 5%, which makes owning Treasury bonds that much more attractive. The equity risk premium is simply not high enough to take on too much risk at this point.

Decide your financial fate with impunity. I'm happy with slow and steady returns as an unemployed person with a son to raise. A 3% – 4% risk-free return on my entire net worth each year sounds sweet to me. When you have the option of eliminating financial stress, do it.

High Yield Returns Now

In 2023, it's a whole different ball game. Money market funds are charging 5% and U.S. Treasury yields are also yielding over 5%. Hence, parking more money in cash makes better sense. Here is an updated bond yield table after the Fed has hiked rates 11 times since 2022. If you are in a high federal income tax bracket, municipal bonds look attractive as well.

U.S. bond yields 2023

Related: Liquid Courage: The Biggest Benefit Of Holding Cash

Check out my Top Financial Products page for more great products.

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I like to invest with a barbell approach. In other words, on one side I invest in conservative investments like Treasury bonds and on the other side I invest in riskier investments for potentially more upside.

Millionaires build businesses and invest in private businesses. Therefore, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

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Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

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82 thoughts on “A Bond Yield Table Makes It Clear Which Duration You Must Choose”

  1. Why invest in a bond step tool that you have to keep adjusting when you can easily invest in a treasury money market fund (such as Vanguard’s for example), which currently yields 2.25% and goes up automatically each time the Fed raises interest rates?

  2. I find both the article and the comments to equally helpful. I watched the 2008 recession as I had just started to have money then, and wasn’t hit too hard by it. I am still 10 to 15 years from retirement, which will put me in my mid to late 50s. That’s the plan anyway. The returns this decade will decide when that happens as much as my savings rate. The core question is what do do when this recession happens. My feelings were that it was coming soon when we got to the longest bull run last summer. We’ve had huge gains since then. The only thing I can think to do is to stay the course and wait for bargins like I did in 2008. I might tune down my investments and take some profit; rebalancing to bonds from stocks, and maybe even moving a bit more than that. Still, I’ll just be thinking this through. There are many things that could change this picture dramatically. Timing the market, though, in any serious sense is off the table for me.

  3. A flat/inserted yield curve doesn’t necessarily mean that one should stick to shorter maturities like you suggest. Market participants are suggesting that there’s a chance that rates could be cut sometime in that 3-5 year horizon and would rather lock in a rate now than only living it in for 3 years and risk lower 2 year rates 3 years from now. For instance the last time the 2 year treasuries yield was the same as the 10 year yield was 2006 when both yielded about 4.8%, those who locked in their rate for 10 years did much better than those who only locked in their yield for two years and then got stuck with yields in the 2%’s for the next 8 years. We obviously don’t know where rates will be in the future and can only guess using forward curves. I think better advice is to match your maturity to when you think you’ll need the money rather than try to be a bond market timer.

  4. It sounds like a genius when one goes to cash or CD on Jan 26 in 2018. Let me ask you all a question. Under what condition would you get back into the risk assets?

      1. I don’t have any back test data to support this idea but I would tend to think your whatever suggested stock/bond combination portfolio combined with a covered call strategy for both assets would outperform a straight stock/bond portfolio. If you are to use this allocation strategy, then why not get extra income every month from the short calls to reduce the cost basis of your assets. I believe it is a win-win strategy. I don’t have any statistics regarding the percentage of retirees who have used this strategy. I absolutely don’t understand why there are not more retirees would use this very simple strategy as it actually reduces the risks of just holding those assets straight up, and the portfolio volatility. We are not talking about using more complicated options strategy, such as long, short butterfly, ratio spreads, condors, etc. The only downside of this simple covered call strategy is one could cap the upside of the assets, but this is the price perhaps one has to accommodate for reducing risks. But then reducing risks after retirement is one of the more important goals, right?

  5. I have talked about this before, and it seems there is one area that very few retirees have ventured into that doesn’t need too much work but could increase your yield and reduce the portfolio volatility. I understand the rationale of hiding in cash and waiting out the volatility. However, Instead of going all or most in cash into CDs, why don’t we have a portion of the portfolio in either long stock indices and treasury bonds and, in addition to the yields from these assets and sell covered calls against them. Or if one is bearish in either stocks or bonds, one could do the opposite, short them and sell covered puts against them. It probably may be a bit more involved than doing the CD or bond ladder strategy, but it is another strategy that produces income stream that likely is higher than what one would get in CDs. For sure unlike CDs, the underlying indices will swing up and down in values and that are the risks one would need to take. Cash safety is over rated in my opinion and of course this is not the view of most people. Instead of avoiding volatility, try to take advantage of the expanded volatility and the option premiums are quite rich these days. At least, that is what I would do with a good portion of my assets when I retire. Recent increased volatility is a bit unsettling and yet the flip side of the coin is, it presents quite many opportunities. But I do understand, for the moment, a majority of people can see but van’t visualize the opportunities.

  6. It worries me that so many comments talk about moving from 80/20 stock/bond allocations to 50/50 bond allocations on the belief that a recession is coming, and then at some point in the distant future said commenter will go back to 70/30 or 80/20 or 90/10 or pick an allocation based on how bullish they are about the market at that time. Adjusting your allocation like this is just market timing, something that is very hard to do and why so many asset managers under-perform indexes over the long-term.

    In my opinion, adjustments to asset allocation should coincide with where you are personally in the life-cycle of your retirement nest egg (i.e. path to financial independence). For someone like Sam who is already financially independent, it makes more sense to go conservative and focus on asset protection versus asset accumulation, especially in times of an uncertain market. For someone 25 years old and maybe 20 years from financial independence, growth should be the focus and the current state of affairs is just background noise.

    Sure you are giving up a $30K risk-free return in Sam’s hypothetical in exchange for a potential $100K gain or $100K loss, but those potential losses are only real if you sell and need the money today. Over the next 20 years, and through re-balancing your portfolio, you are likely to come out ahead.

    What say you Sam? Do you agree that adjusting from equities into bonds based on market expectations is just a way of trying to time the market and that if your investment horizon is 20 years you should stay the equities course? I personally know people still in asset accumulation stages of their lives who went conservative in 2015 thinking a recession was coming and moved from 70/30 allocations to 50/50 and lost out on some spectacular gains the past 3 years. When I read similar statements in the comments based on this blog post I cringe inside.

    I also think a recession is coming but I don’t know if it’s coming next month or in 3 years. The only thing I DO know is that I don’t need to touch my portfolio for at least 10-15 years (baring some catastrophic event that bleeds my 6 months savings cushion dry) so I am staying the course at an 80/20 allocation, fully realizing that at some point my portfolio will take a hit, but also fully expecting that it will recover before I need it and through re-balancing during the downturn I will be buying low and selling high.

  7. For simplicity, couldn’t one buy VTEB (Vanguard Tax-Exempt Bond) ETF with a 30 day SEC yield of 2.85%? Thanks in advance

    1. Besides the difference in duration (VTEB holds long-term bonds), municipal bonds in general are very different from Treasury bonds.

  8. wallstreet69

    yes, i am a washed up swaps trader now living in the midwest. still working, but it is fun (mostly). your posts about rental real estate in the midwest are spot on.

    i think we will more likely see a bull steepener (front end lower) versus a bear flattener (long end higher) once the curve fully inverts.

  9. nofreelunch

    Not many people realize that if you bought a 30 year bond 30 years ago, you would have made 9%/year, not including compounding, which beat the SP500. What seems like the worst time to invest in longer duration is when the yield curve inverts, but an inverted yield curve is one of the better indicators a recession is near, and in a recession, longer duration bonds win, since the shorter ones expire and replaced with ones of lower yield. Treasuries are extremely liquid and longer duration treasuries can be sold at quite a profit when their yield is above current rates, and in a recession cash from sales can be used to purchase depressed stocks. Finally, current financial economic good health is not a good indicator of a pending recession. For example, in Jan 1929, unemployment was at 3% and GDP growth was at 6%.

    1. True, but recessions tend to only last for 6 – 24 months. In the long run, you want to be invested in stocks.

      Buying a 30-year bond with a 9% yield is quite different from buying one today with a 3% yield imo. But everyone can do as they please with their money.

      1. Agreed –
        Also normally the yield curve inverts and a recession follows 12-18 months later
        I wouldn’t dream of going long bonds (esp 30 years!!) unless they raised 2-3 more times, stopped, and it was much closer to a recession than it is today (eg yield curve fully inverted and has been for months, reduced PMI, lower corporate earnings, …)
        To be fair even in that scenario I still wouldn’t go longer than 10 year
        I agree with FS for now

  10. wallstreet69

    the best fixed income investors know that when the curve flattens you extend duration // not shorten. fixed income investors = have fixed income as a core holding.
    this doesnt seem right given the risk / reward….but the flattening curve (based on your other posts) is telling you something. in 12 months time, the 12 month CD rate is likely going to be lower than the longer duration rate you could’ve locked in 12 months ago.

    so, as yourself, do you want CDs as a core, long term holding for more than a year? if yes, the curve is telling you these short rates aren’t going to last. extend duration. yes, the current sharpe ratio tells you otherwise….but…

    1. That’s the beauty of the market. So many factors go into play, you got to do what’s right for you.

      A 12-month CD/UST yield is supposed to be lower than longer duration. And when it’s not, I pile in. There is no way I’m going to lock up the majority of my liquidity in longer duration CDs/bonds with lower yields.

      At the end of the day, what matters are your overall returns for the year. My long term goal is not to build wealth through short-term CDs or bonds. Risk-free instruments are for maximizing the returns on my liquidity, and at this point, capital preservation.

      Is your background in institutional bond trading?

  11. No brainer and best rate for me right now is Ally 11-month no penalty CD at 2.25 for at least 25K.

    1. FIRE and Loving It

      Big fan of Ally, but one year (I realize not 11 mos) brokered CDs (I realize not “no penalty withdrawal”) are paying 2.75%. Either can be good for different intentions.

  12. Real nice blog! My first visit here. I have only been blogging myself since July at age 67 (yes that is not a typo). Although I have no hope of matching anything like this site, I do enjoy it!

  13. I’m still learning about bonds, but I really don’t understand why the fed doesn’t start dumping more of their balance sheet into the market… That would normalize their holdings more quickly and push up rates on bonds with longer duration to avoid an inversion. What am I missing?

    1. They have been dumping more of their holdings on the market steadily and materially increasing it over the last couple years.

      1. I thought they were letting holdings expire only, not actively selling for fear rates would shoot up.

        1. The fed is actively selling and recently talked about raising the amount they will sell. Some people say that China hasn’t been purchasing treasuries lately either. This in itself you would think make long term rates rise.

          The problem with that theory is that there is a HUGE demand for yield. Think large insurance companies, endowments, sovereign nations, retired people, hell, everyone who wants a little safety in their portfolio. Germany is paying .4%, Japan is paying .08 percent on their 10 year treasuries. The USA is paying around 3%. The Us is also considered the safest nation in the world so you got to ask yourself, where would you put your risk free money?

          Until the rest of the world raises their rates the US has no competition and the yields will stay historically low.

          I hope this helps.


  14. Being an avid reader of FS for a while, Sam’s advice was to convert excess gains in stocks to real estate. As for paper assets like bonds or commodity assets like gold -yes gold is a commodity too- sorry! – A house is a forced savings plan, a place to live and a tax write off. Please tell me of something better, 20 years from now.

    1. Gold has been like a commodity under the influence of the ESF’s suppression policy so as to provide the planet a TINA situation.

      At the end of the day gold is still a neutral reserve asset on central bank balance sheets/ Why do they hold it? Where does credit go when it dies? What can be used to reliquify the system in a debt deflation?

  15. siliconvalleyscrooge

    For the readers who are newer to the bond markets, be aware that for shorter duration Treasury issues the capital outlay may be larger than for longer duration issues.

    E.g., your broker may require a larger number of bonds to be bought for an order of 1-year Treasuries than when placing an order for 10-year bonds.

  16. I am one of the crazy people who have started to buy some longer dated bonds. I recently purchased a few 7 year muni bonds that have a tax adjusted yield of 5.15 percent and a real rate of return of 3.25%

    I have always kept a higher than average cash position as it relates to my overall net worth. After 10 years of basically no returns on that cash it feels really good to lock up a small amount longer term.

    The majority of my cash is in shorter dated bonds. I too am rolling the dice that the fed will keep raising rates and I will be able to lock money up at a higher rate of return. However, I’m wrong more than I’m right predicting the future so locking up some cash longer term is my hedge.

    Thanks, Bill

    1. That’s a pretty good tax adjusted yield. I’m zeroing in on Treasuries as they are slightly a different investment with a different purpose than muni bonds.

      The spreads between muni bond durations is SIGNIFICANT in the bond yield chart, unlike the spreads with US Treasuries.

  17. I’ve become a growing fan of bonds as every year passes. I bumped up my allocation across Q3/Q4 and feel pretty good about it. My stock allocation is hurting lately, but I’m trying not to think about the short-term on it too much since I’m long focused and don’t need to sell any time soon. Great insights on the bond yield table. Really helps to see the rates laid out like that!

    1. The more I look at my stock portfolio, the more convinced I become that fixed deposits (CDs) are the only way for me. Though tax is a killer, it’s way better to watch positive single digit growth on my fixed deposits than double digit losses on stock.

  18. What are you doing with your existing bond ETFs?

    For example, IEF holds 7 to 10 year Treasury bonds. If you have IEF in your portfolio, you’re effectively locking in your money for up to 10 years for a tiny duration risk premium.

    Would you sell IEF now to move into shorter duration bonds?

  19. I’ve also been struggling about what to do with fixed income portion of my portfolio. During the run up, I’ve been investing in high yielding dividend stocks, business development company stock, preferred share etfs, as well as, some private secured loans to increase yield in this still historically low interest rate environment. However, my publicly traded assets seem to move in same direction as the public equity markets so I am not getting much diversification nor capital preservation. My private loans offer much higher yield 7-9% but are less liquid so I may not be able to reallocate capital when I need to re-balance or be opportunistic.

    I am thinking about building a yield portfolio than consists approximately 50/50 split of private loans (avg yield of 7.5%) and MM fund/short term bonds (yield 2.12-2.55%) for avg yield between 4.5-5%. I think this maintains yield above inflation, offers sufficient capital protection and liquidity for the near term.

    Would appreciate any feedback, constructive critiques from the peanut gallery.

  20. Great post
    You answered a few of my questions in previous posts
    Literally – already – I’ve saved 30k by taking on less risk (was 70% equities but rebalanced to less than 50%). The reality is that with reasonable clarity rates are going to grind higher and equity valuations are going to grind lower
    Short term bonds and CDs are a great place for secure investment at the moment. When you look at how much more cash in the form of QE now has to get reduced out of the system by QT it is terribly sobering .

    I’d rather (on the equity side) see paper losses of 25% of my total wealth in a bad bear market (50% fall in major indexes) because I’m suitably diversified in safe investments. I think it is crazy that there are people right now sitting on 80, 90% exposures to the market and expecting this rally to continue well into the next decade

    Irrational Exuberance is the book that immediately springs to mind!

  21. Sam,

    You have mentioned taking more risk when young in the past. “Young” could be translated to anybody not financially near retirement. Would you take more risk right now if you were still working in corporate america and had at least 5 of your prime earning years ahead of you before thinking of retirement?


  22. FIRE walk with me

    Do you (or any of your readers) have recommendations for the highest yielding, high balance, FDIC-insured money market accounts? Some banks offer high initial yields to get people in the door, then quietly lower them later. I’m lazy and would like to not have to frequently switch banks!

    1. Purepoint! It’s a high yield savings account that beats money market yields and commits to being the highest rate and adjusting quickly. It’s backed by Mitsubishi Financial-a huge Japanese bank.
      I used to jump banks every time there was a yield differential, but Purepoint has consistently stayed on top.

      1. Christine Minasian

        Thanks for the PurePoint recommendation! I was looking for a good money market acct!

    1. FIRE and Loving It

      Assuming you have a brokerage account with one of the FS article named brokers that do not charge, you likely want to have it consolidated in one place to see your positions etc. along with other investments. But yes, Treasury Direct works. The marketplace has caused many name brand formerly known as “discount” brokerages to offer strong values across the full asset spectrum (mass market through UNHW) – and these asset types (UST) are intended to provide a full investment offering to build a longer term client relationship (not really a direct revenue source).

  23. “You would have to be a moron to tie your money up for 10 years for such a tiny premium. And you would be a fool to own a 3-year or 5-year bond when you can own a 2-year bond with the same yield.”


    For a smart guy, your analysis is sometimes painfully shallow. You’re missing some major (and pretty obvious) points. Dismissing bond traders and investors as “morons” is incredibly hubristic. There are plenty of reasons you’d invest farther out on a flat yield curve.

    1) If we enter a recession, that “high” cash yield goes back to 0. There’s a good reason you might want to “lock in” a rate further out in the yield curve if you’re worried about where we are in the economic cycle. Your reinvestment rate for cash and short term bonds is highly uncertain.
    2) Longer term bonds stand to appreciate in value a lot more than short term bonds in a recession. When stocks get slaughtered, your 10Y-30Y bonds will probably show some nice gains, while your cash and T-Bills won’t. They serve as a portfolio diversifier.
    3) By investing in 10Y treasuries, you’re not “locking up” your money for 10 years. It’s not a 10Y CD. You can trade in and out of bonds like stocks. When the economy tanks, you can harvest the gains on your longer dated treasuries and reinvest in cheap stocks.

    The flat yield curve tells us something. Namely, that a recession might be looming. In a recession, you’ll want to own 10Y (or 30Y) bonds, not T-Bills.

    It’s great to have some cash, and cash is looking more attractive than it has in a long time, but don’t oversimplify the story and call people “morons” for investing in a way that might end up being pretty smart.

    1. Fair points. Ah, two mistaken assumptions you’ve made:

      1) You think I’m smart. I went to public school and I’ve been unemployed since 2012. If I was smart, I would have gotten scholarships to the top private schools and have an incredibly high paying job in this bull market.

      2) My audience is filled with bond traders. FS readers are actually mostly personal finance enthusiasts looking to achieve financial independence.

      How are you investing your money? Always good to hear what readers are doing to get some background. You are free to invest in longer duration bonds over shorter duration bonds if you want. That’s the beauty of the open market. Nobody is forcing you.

      BTW, can you explain how money market rates and short-term bond yields go back to 0% in a recession?


      1. “BTW, can you explain how money market rates and short-term bond yields go back to 0% in a recession?”

        The fed will cut rates to 0 to stimulate the economy. That’s probably especially true in the next recession since we’re already running an enormous deficit, so will have fewer levers to pull on the fiscal side. Monetary policy and lower rates will be the go-to mechanism to goose the economy. Of course there’s no guarantee short term rates go to 0 (or close to it), but it’s probably as safe an assumption as you can make in finance.

        1. Gotcha. So you’re taking the bet that the Fed will cut the Fed Funds rate to 0% despite the street betting with the Fed’s guidance that they will be raising rates 1-3 more times in 2019 by 25 bps each.

          I think you could make a lot of money with that bet given it is very contrarian. I’m happy to bet the Fed won’t cut rates to 0%, resulting in a massive surge in bond prices as a result by Dec 31, 2019 giving you 3:1 odds or by Dec 31, 2020 for 2:1 odds. Let’s do a friendly $100. I think it’ll be fun!

          1. The cut to 0 rate is contingent on a recession, not the default path for 2019 or even 2020, so you’re implicitly mischaracterizing my argument for bonds.

            Right now most economic indicators are strong, so I fully expect a few more hikes. I also don’t expect a recession in the next year or two, so your bet isn’t tempting (I’d take your side!).

            Does that mean you shouldn’t own any longer dated treasuries? No. Why?

            1) Just because a near term recession isn’t probable, doesn’t mean it can’t happen. Part of good portfolio construction is hedging various (often unexpected) contingencies.
            2) Just because a recession isn’t likely in the near term, doesn’t make 10Y treasuries a loser. Let’s say you invest in 3Y bonds and I invest in 10Y bonds at the same rate. Let’s also assume a recession hits in 3 years. You will have clipped your 2.8% return. I will have clipped my 2.8% return + price appreciation from lower rates. In other words, even if you’re right that a recession is 3 years+ away, buying longer dated treasuries could still be a winner.

            In short, investing in cash or short dated treasuries vs longer treasuries is an economically bullish bet. You’re betting that the economy remains strong, the fed continues to hike, inflation numbers remain perky, and a recession remains at bay for years. I’m not saying that bet is wrong, I just think it’s important to map out your return profile in various economic scenarios. When you do that mapping, I think longer term treasuries no longer look like an investment that only a “moron” would make.

            As for making a bet, I’m happy to bet $100 that Fed Funds are between 0-50bbps when we’ve entered a recession, which is my real argument. My crystal ball is cloudy with respect to when that actually happens :)

            1. 0-50 is quite different from 0.

              But I’ll give you the recession first before your rate cut call, which is a huge benefit to your prediction, but you have to stick with 0 with the Fed Funds rate.

              You can’t have “when there is a recession” AND 0-50.

              Confirmed for $100.

        2. LSAP as delineated in Bernank’s Making Sure Deflation Doesn’t Happen speech in 2002.

          FF to the two paragraphs under Fiscal Policy and you’ll see what’s coming.

      2. Too funny! I think it’s great John wants to lock up his money for so long despite shorter duration bonds offering a close yield. That’s the beauty of the markets. People are free to invest how they way.

        I would like to take you up on the bet John too regarding the Fed cutting rates to 0% by 2020.

        1. a) Your funds are not “locked up” in longer bonds. The US 10Y is literally one of the most liquid financial instruments on planet earth. In a recession, you can sell your 10Y bonds (likely for a profit) and reallocate to equities or whatever other asset you choose.

          b) I don’t think Fed Funds will be 0% by 2020 (nowhere did I claim this) and would happily bet against that too. However, even if a recession takes 3-4 years to hit, 10Y treasuries still might end up being a more profitable investment. You’ll have the same carry as shorter bonds, and get the benefit of price appreciation too (I detailed my rationale in a response to Sam’s wager proposal).

          c) As usual, this isn’t a binary. It’s probably prudent to own a mix of shorter dated and longer dated bonds to hedge various economic outcomes. If you’re confident the bull market continues for the next 4-5 years, you should lean short dated in your fixed income investments (and probably be heavier in equities for that matter). Long dated bonds are defensive. A flat yield curve doesn’t change the fact that they’re still likely to outperform cash/T-Bills in a recession.

          1. Money Ronin

            John, thanks for your perspective. No one can predict the future, but I think few people (including myself) understand the liquidity and appreciation/depreciation aspect of long-term bonds. It’s an important component of a portfolio which I admittedly under-utilize.

            1. FIRE and Loving It

              I understand it well (the liquidity etc) – most of us would consider that a trade vs investment or at a minimum an investment awaiting a trade. Both of which are completely fine, but there are more applicable websites for trading treasuries (and to be honest, some of the smartest people in the world are trading treasuries institutionally and I’m not one of them so I don’t play that game). My view is to the take the least amount of risk necessary to achieve your long term goals. Which is for each person to decide and FS does a great job in articulation relevant considerations for people to decide on various topics.

  24. A timely post (as usual), Sam – thanks.

    I just started a step stool of 1 year CDs two months ago. The goal is $1000 per month for 12 months. 10 to go!

    I guess I’m still calling it a ladder, but it raises the return slightly on my cash regardless.

    – Mike

  25. Should our 401ks be placed in bonds? Do u have an article on how to deal with your pension in a bear market?

    1. Should you invest in bonds in your 401k you mean? I don’t see why not as owning bonds is a basic part of asset allocation.

      Not much you can do with a pension in a bear market. You can analyze your company’s financials. You can hedge as well by shorting your company if you feel it’s healthier than the market thinks. You can also hedge by buying other securities.

      Related: How To Make Money During A Downturn

      1. Thanks, I guess I mean do u move most of your 401k assets to bonds to prevent any big losses if we go into a recession?

  26. All sovereigns will default. Simply no way around it. They will default against gold.

    The mismatch between assets and liabilities on CB balance sheets will be rectified by revaluing gold.

      1. High probability window between 2021-2024. Definitely by 2032.

        Though could happen sooner. Perhaps next year as bodies start floating to the surface.

          1. Been prepping for 10 years. Buying negatively correlated assets on the cheap since.

            The great bear between summer of 15 to 1/19/16 was the valley of the shadow of death I walked and accumulated what will be life changing positions.

            1. Sorry it’s been such a strong market then since the preparation. I think you’ll eventually be right on the downside, but not sure about the magnitude.

              Can you give some examples of cheap negatively correlated assets (to what) you’ve been buying for 10 years?

              A reader talked about Hussman being very bearish, which I thought was interesting.

              “We presently estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 index, -57% for the Nasdaq-100 Index, -68% for the Russell 2000 index, and nearly -69% for the Dow Jones Industrial Average.” Hussman

            2. I am also curious what those negatively correlated assets are ?

              When I’ve read into “short funds” and “bear funds” they are all really horrible stores of value and most of them are down 50-70% since 2015 which is awful !

              If there was a convincing way to short the market we’d all be billionaires IMHO

            3. Exter’s Liquidity Pyramid shows what these neg correlated assets are.

              A most powerful deflation awaits. So powerful that bonds will default and currencies be devalued to reconcile sovereign balance sheets.

              Central banks did not save the system in 2008. Merely translated the problem onto their balance sheets. Bought time hoping real organic growth would inflate liabilities away. But CB assets grew way faster than the economy. Escape velocity never achieved. Soon the truth of the predicament will be seen. Typically 15 months after EMs have problems is when stiffed creditors start floating to the surface. So right about next March to June is when TSHF and the crisis will be upon us.

        1. How can a sovereign nation default when they owe in their own currency?

          You might say there will be inflation. You might say a country that borrows in someone else’s currency might be in trouble.

          1. We did it in 1971. Aug 15th, 1971.

            From there we went from 44 dollars to 875 in Jan 1980.

            Then the Summers Rubin gang were brought in to manage this asset in 90s to hide the fact real Treasury yields were becoming negative.

            1. This, while having zero value to me, makes an interesting conversation as well proves that instead of trying to predict the future and trading in and out you should have invested in productive assets such as stocks which have risen from 95 in Jan 71 to 2633 today, using sp500 prices.

              Recognizing that it is normal for the market and economy to go thru cycles, good companies produce real returns, that’s why we invest.

        2. Linda, I suppose the US might “default” on real basis…but defaulting on a nominal basis is very unlikely. In fact, it’s almost inconceivable. In other words….you’ll make your 3% plus principal but it may not buy what it did last year. Sam is right…stay SHORT duration.

          1. It’s real yields that count. Not nominal. You have to do what Barsky-Summers tells you to do when real rates are negative. Even if that asset is financially repressed as part of macroprudential policy. Eventually all “pegs” break. Even the 1200-1300 peg.

  27. I’ll admit to hoping for the same thing: the 2/10 year yield curve portions not inverting and the bull market running longer. And all the while, I’d get a decent return on my cash. Will it happen? History says no according to Bianco Research.

    “When the front-end of curve inverts, the 3 month/10 year curve eventually follows…We can find no historical example of the 2 year/5 year inverting without the 3 month/10year eventually following suit.”

    It doesn’t mean it’s a guarantee it will invert, but there hasn’t been a time in history where it hasn’t once other parts listed above have.

    I’d love for there to be a Santa Claus rally to give some upside movement and I could sell some of my stock holdings I have been planning to put into short-duration bonds. We’re trying to save for a house down payment and would prefer some lower risk investments to guarantee the funds will be there when we need them in the next couple of years.

  28. You are definitely living example of Bernstein’s advice, “When you won the game, quit playing.”

    The bond step stool does sound like a great plan to take advantage of a rising interest rate environment that we are currently in. I too feel that equities are not going to keep chugging along at the 8%+ return rate we have gotten spoiled with and if it indeed goes to 5% or so, the 2-3% difference in potential gain does not justify the volatility of stocks that is the price of admission.

  29. Just put 800k in Citizens Access high yield savings (citizen’s low overhead, online banking product). Currently 2.25%…happy to be on the sidelines. I’ve got another 250k to deploy soon. I’d love to do better than this rate (although it’s as good as I’ve seen lately). Maybe some needs to go to bonds. …Cautiously lurking!

    1. I buy directly from my Fidelity investment account. I’m pretty sure any online brokerage account can provide access directly to USTs without a markup e.g. Schwab, TD Ameritrade, etc.

      We’ve seen a great move up in bond prices over the past week at all durations fyi.

      1. Watch out. Some of the online brokers have insane markups because bond prices are always quoted as yields. The exact same CUSIP can differ by 20-25 bps on different platforms.

      2. Sam,

        It looks that the treasury yield (3-month and 6 month) is better than 1-year CD rate. Wouldn’t it make sense to buy short(est) term treasury than CD? That way, you have better liquidity and may purchase a higher yield of treasury in 3 – 6 months. Any thought?


  30. Great post Sam. I just started moving some cash into 26-week and 52-week US treasuries in the past month. Looks like we are on the same page… :)

  31. “Cash Is Now A Wonderful Asset Class”

    I could never have imagined anyone writing that even last year. I am sitting on some good cash and getting 2% in a credit union. But I’ve been lazy about starting a CD or Bond step stool. I need to stop being lazy and take the money that sitting on the table for me. Great post.

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