Investors were handed an income opportunity they haven’t seen in more than a decade when the 10-year Treasury yield climbed near 5% on Thursday. The benchmark hit 4.996% , its highest level since 2007 — when it yielded as much as 5.029%. That was also the last time it yielded 5% or more. Bond yields move inversely to prices. A move above 5% will lead more investors to scoop up the assets, predicted certified financial planner Barry Glassman, president of Glassman Wealth Services. “The clamoring for the 10-year with a yield greater than 5% is so profound that I think pensions, institutions, foundations, those who have 5% annual obligations, I think this is a huge relief to them,” he said. “Whatever volatility there may be is far less than the attractiveness of earning a locked in, guaranteed 5%.” US10Y 5Y mountain 10-year Treasury A 5% yield on the 10-year is a good value, said Kathy Jones, Charles Schwab’s chief fixed income strategist. “There is value because the real yield is above 2.5% and we haven’t been there in many, many years,” she said. A real yield is a bond’s nominal yield minus inflation. It can also make sense for those who are worried about the economy and a potential recession. “Long-term Treasury debt has generally done well during recessions; it has worked great as a good hedge against economic calamity,” said Callie Cox, investment analyst at eToro. “With the 10-year yield nearing 5%, it could be your sign to pick them up.” Staying diversified in Treasurys That said, yields are high across the Treasury market, so investors shouldn’t just focus on the 10-year. That’s why laddering can make sense — in other words, compiling a portfolio of bonds that mature on different dates. That can mean anywhere from the 1- to 10-year duration for Schwab’s Jones. If you don’t want to take interest-rate risk, you can look at going as long as five or seven years, she said. “Over the next 12 months, you would have to have another big surge in yields to have a negative total return,” she said. If yields go up on the long end, you’ll be reinvesting at a higher yield and generating more income, she added. Amy Arnott, portfolio strategist with Morningstar, also thinks Treasury inflation-protected securities are attractive right now. The yield on the 10-year TIPS is at 2.49%. TIPS yields account for inflation, unlike standard Treasury yields. “You are getting that guaranteed yield over and above inflation,” Arnott said. “Especially for people who are in retirement, we have been recommending building a TIPS ladder as a way to lock in a guaranteed rate and generate income that you can use each year to cover your living expenses.” CDs for short-term dollars Investors shouldn’t squirrel away all their money into certificates of deposit, but for those who want to earn a little interest on some of their savings, it could be a good time to snap up a CD. “Any way you can lock in rates on cash and savings right now has got to be attractive,” said Cox of eToro. “CDs are thought of as this boomer tool, but when rates are this high and you don’t need the money for a set amount of time, this is a great option to lock in a rate.” One-year CDs are yielding over 5%, benefiting from the Fed’s moves to raise interest rates. A one-year CD at LendingClub offers an APY of 5.65%, while the 2-year CD yields 4.5%. Just be sure you’re willing to go without those funds for a while, as breaking a CD can subject you to penalties in the form of lost interest. Money markets Money market funds also have attractive yields right now and could be a place to park some cash. The average yield on the Crane 100 list — which includes the 100-largest taxable money funds — is 5.18%. However, the funds hold extremely short-term debt, with weighted average maturities for retail government funds around 25 days. “You’ll have more decisions to make down the road,” Schwab’s Jones said. The difference in yield between money market funds and the 10-year Treasury has also shrunk, said John Croke, head of active fixed income product management at Vanguard. “The benefit to being overweight in cash is much less compelling, and going out the curve, taking more duration and returning to your strategic allocation is much more attractive versus juicy cash yields.” Beat-up dividend payers Investors may also find an opportunity in rate-sensitive stocks that have been beaten up. Rate-sensitive corners of the market include utilities and real estate. The utilities sector is down 15% in 2023, while real estate is off more than 9%. “Dividend paying stocks have been crushed recently, but if you think rates can’t get higher from here, pick up some of those rate-sensitive stocks,” Cox said. “If you have that long-term perspective and are willing to take some more pain, this might be a time to dig into dividend payers.” Be wary of leaping into names that pay an eye-popping dividend and have seen sharp declines, though. Financial durability, especially with recession risk looming, should be a priority for investors in search of dividend paying stocks. Ways to play the space include the ProShares S & P 500 Dividend Aristocrats (NOBL) , which has lost 1.72% year to date on a total return basis. It has an expense ratio of 0.35%. There is also the Vanguard High Dividend Yield ETF (VYM) , which has lost 2.59% and charges 0.06% in fees. Corporate bonds High-quality, investment-grade corporate bonds are also a good option to pick yields topping 6%, said Jones. “Since it is investment grade, their risk of downgrade, the risk of default is pretty low,” she said. The bottom line Just remember to stay diversified when it comes to your overall portfolio. “We never recommend that people make dramatic short-term shifts in their mix of stocks and bonds because usually you end up hurting yourself if you are trying to time the market,” said Morningstar’s Arnott. “I would say that bonds are looking more attentive relative to stocks than they have in quite some time. So if you have money to invest, you may want to consider tilting a bit more to the bond side than you have in the past,” she added.
