As yields rise, is it time to invest in bonds?

U.S. Treasury yields have been on a tear as of late. The 10-year yield alone has soared more than a percentage point in four months and is nearing 5%. Investors may be asking, is it a good time to be invested in bonds? Here right now to discuss, we've got Tom Tesouras, who is the head of fixed income research and chief fixed income portfolio manager at Strategia Securities. Tom, great to have you here with us. First, let's just start there. Is now a good time to consider investing in bonds? I'd say generally, yes. I mean, obviously, there's still further upside risk and yields. The economy is still strong. We are very likely looking at a second wave of inflation coming sometime in the next 12 to 24 months. And we have to deal with very large deficits, previous deficits that need to be refinanced into longer duration bonds, as well as potential future deficits. With that said, we're very late in the business cycle right here. And that means there's a great deal of risk to credit and equity markets and the economy as a whole. And you really can't get that type of protection from an economic downturn from anything other than safe haven assets like long duration U.S. Treasury. So for buy and hold investors right now is generally speaking a very good time to be entering into bond positions. Likewise, if you're a buy and hold investor, you're probably going to exceed inflation by a good 100, 150 basis points. So there's an attractive entry point, but it could get more attractive. OK. And so if someone holds bonds right now, should they sell or keep holding? Generally, we devise against selling. And so we're telling clients it's not a time to be a hero and it's not a time to panic. That is, we'll probably see a better entry point. But at the very same time, we're very likely to see yields eventually reverse lower. So if you're looking to liquidate because you need cash, there will probably be a better time to do that in the not too distant future. So which duration right now are presenting perhaps the most attractive opportunities for investors? For the most part, between the five and 10 year portion of the curve. And there's a few reasons for that. One is because, again, you are being compensated versus where inflation is today and where inflation is likely to be. So you have yield pickup on top of inflation in the five to 10 year portion of the curve. You also don't have a very large amount of duration. That is interest rate risk when you're starting to look towards like a five year portion of the And what's more, even if you do have to liquidate that position, you're anticipating you might need the cash in a year. A year from now, the yield curve is so upward sloping that for most part, you're actually pricing in price gains on top of the yield you're picking up. And that's simply a phenomenon of the upward sloping or lower duration yields being below longer duration yields. 10 year portion of the curve, you pick up a little bit more yield, but you obviously pick up more risk. So somewhere between that five and 10 year seems to be the sweet spot. OK, so broadening out here, any advice to young investors, perhaps early 20s, who are evaluating the bond marketplace right now? Yeah. And I'd broaden this out to young investors in general. And that is the era of very low financial volatility, stability. That was an illusion. That's not normal. In the case of yields, yields are not only supposed to be higher than what they were last decade, but much more volatile. Yields typically are very volatile. And that translates into volatility in other corners of the globe, not just bonds, equities, Bitcoin, gold, everything you can think of. So there was an illusion of the last decade of price stability, of asset stability. This is more normalized what we're seeing today. So that doesn't mean we're going to see this level of volatility every day for the next 10 years. But this is more the norm. So the advice to younger investors is recognize that volatility is probably here to stay in some form. And unfortunately, the thing about volatility is it comes at points when you least expect it. Isn't that the thing, though, when you're a younger investor, your propensity for risk should be a little bit higher because of the long term nature of how you're investing as well. So within that question, I guess that there's a question within the question of how much should you be allocating towards bonds, even if you are already seeking more risk? Well, typically, if you're a younger investor, let's say less than 30, you might not want to be allocating a whole heck of a lot to bonds right now at this point in your life. But because we are so late in the business cycle and by that we mean this has been an expansion that has lasted, we'll call it four years. There's been tremendous growth for much of that four year period. And equity prices have seen exceptional appreciation. You probably have more than typical price risk and equity. So a slightly larger allocation to bonds for younger people might be more warranted right now. With that said, you're probably still talking something less than 20 percent of your portfolio. Interesting. Tom, thanks so much for breaking this down for us. My pleasure. Thank you.