Since late 2022, we’ve had an inverted yield curve, which is when shorter-term fixed-income investments actually have higher yields than longer-term fixed-income investments. That’s not the typical situation. Bonds with longer duration have more interest rate risk (price volatility), so they typically have higher yields to compensate for that higher risk.
But, right now, they don’t. For instance, as of right now, the yield on 1-month Treasury Bills is more than a percentage point higher than the yield on 30-year Treasury Bonds.
And that leads to one of the most common questions I’ve received over the last year: if cash (and other super-short-term fixed-income options) actually pays more than longer-term bonds, why would I use longer-term bonds at all?
In a recent article, David Blanchett dove into one such reason: reinvestment risk. With cash and similar, you know what rate you’re getting today, but there’s no way to know what rate you’ll be getting in even the intermediate-term future. And as Blanchett found, the way an inverted yield curve often “fixes” itself is by cash yields falling.
Beware of Reinvestment Risk When the Yield Curve is Inverted from David Blanchett
Other Recommended Reading
Sharpe’s Arithmetic and the Risk Matters Hypothesis from Victor Haghani, Vladimir Ragulin and James White
The Holy Grail of Portfolio Management from Ben Carlson
More Than Half of Americans Want to Retire Gradually from Michael Fischer
The No. 1 In-Demand Remote Job Companies Are Hiring For from Morgan Smith
The Seasons of Life from Jim Dahle
The Case for Using Subsidies for Retirement Plans to Fix Social Security from Andrew Biggs and Alicia Munnell
Thanks for reading!
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