The bond market is now offering investors a sweet deal, with short to intermediate maturities providing a good combination of risk and reward.
Jim Dadura, director of fixed income at Segall Bryant & Hamill in Chicago, which has about $21 billion in assets under management in mutual funds and private and institutional accounts, dug into some of the technical factors underlining how attractive the intermediate maturities are today. “Keep in mind that there is a big plus and a big minus in their heads — not mine. The big plus is the yields you can squeeze out now — they are tangible. The negative is they have taken a hit on what they have had in their portfolios,” he said.
The duration of a bond portfolio is a measure of its volatility. The duration number indicates what the percentage change in market value that can be expected for every 1% move up or down for interest rates. Summing up the current scenario for bond investors, Dadura said “you do not have to take a lot of risk, with more yield than duration” in shorter-term bonds.The inverted yield curve, with 10-year Treasury notes yielding less than 2-year notes, indicates expectations of a recession because enough bond investors see interest rates falling as the Fed reacts to an eventual economic slowdown.
If you hold U.S. Treasury paper, the interest is exempt from state and local taxes. That might be meaningful depending on your tax rates. You can calculate your own fully taxable equivalent yield by dividing the yield by 1, less your highest combined state and local graduated income tax rate.