So much to write about, sometimes I need to just pick something.
So this morning, since there is plenty of “unrest” in the markets, I want to highlight that the U.S. 10 Year Treasury Note Yield is sitting at a record low 1.273%!**
That’s right. Lock your money up for 10 YEARS and receive a whopping interest payment of 1.273% per year, without any adjustment for the effects of inflation. Ok, yes, I agree, what you’re buying (not investing in) is a U.S Government Bond that is fully guaranteed– actually the proper verbage is it’s guaranteed “by the full faith and credit of the U.S. government” and “that interest and principal payments will be paid on time”– BUT and this is a BIG BUT–
You’re only guaranteed to receive your principal back if you hold these bonds until maturity! This needs some explainin’:
For instance, if you bought a 1o Year Treasury Note at issuance today, with a denomination as low as $1,000, with a stated rate of 1.273%, you will receive this interest payment semi-annually (pro-rata of course) and then receive your $1,000 principal back at the end of 10 years, only then, and exactly then, and only $1,000, nothing more nothing less. Period.
However, what if 5 years from, the prevailing 10 Year Treasury Note is being offered at 2.50%, or even 3.00%. That’s no good for you, since your Note is only paying 1.273%. So you could sell your Note (in the open market) and buy the 2.50% Note, but you’d sell yours at a LOSS, because “bond prices and interest rates move inversely”. That is, as rates rise, bonds prices go down, generally speaking, all things are equal.
That’s called interest rate risk! Then there’s the opportunity cost of the investment. Do you think another investment (maybe the market in general) 10 years from now will be worth more or offer better risk/reward? Maybe, maybe not…
Anyway, there’s a lot more to this and I’m not implying or recommending to not buy bonds or not allocate a portion of your portfolio to bonds/fixed income, because you most always should.
I simply want to point out that the 10 Year Treasury Note yield issitting at a record low, due to the Coronavirus crisis– Sell Stocks > Buy Bonds!! And not just any Bonds, primarily zero credit risk U.S. Government Bonds! As more folks rush to buy bonds, prices go up and rates go down (remember the inverse relationship?) and as more folks rush to sell stocks, prices go down (that one is simply supply/demand).
Anyway, carry on and don’t panic, or try not to if you are on the verge or already are.
**I haven’t even finished this post and it’s sitting at 1.257% (10:38 AM EST). Thank you Wall Street Journal!