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What’s going on with the yield curve, and how does it impact you?READ THE ARTICLE
Where we’re at: Currently, the Treasury yield curve is inverted, with one-year T-bills offering 5.4 percent and 10-year Treasury bonds at 4.3 percent. This means you might be facing an investment dilemma: Earn a higher rate for a year and hope for the best next year – Or, lock in the highest 10-year rates since 2007.
Consider history and look forward: You might typically expect higher rewards for holding longer-term bonds, but when money market yields exceed 10-year Treasury bond yields, this opportunity cost diminishes. However, the market's expectations suggest that rates may fall in the coming years, potentially penalizing those who move from bonds to cash.
Historical evidence from multiple countries suggests that shifting to short-term Treasuries during inverted yield curves has been a wise choice, but this requires monitoring your portfolio and returning to bonds when the yield curve normalizes. Further, short-term bills carry reinvestment risk if bond yields subsequently decline. Ultimately, an inverted yield curve is temporary, so you may consider allocating to shorter-duration fixed income investments in today's high-yield environment, but this strategy relies on market timing.
Before you make a move (if any), make sure to consider what makes most sense for your unique situation. Treasury bill returns are predictable with low risk, while longer-term bond returns are unpredictable and volatile. Know your pros and cons.