Commentary: Invest in mid-to-long term bonds to avoid reinvestment risk
Last week, global stock markets saw strong performance, with US techs and Japanese broad market equities outperforming. Interestingly, yields on US fixed income declined, despite a higher-than-expected US inflation print. The declining trend in yields has been in place for months now, as 2-year and 10-year treasuries, which have peaked at 5.2% and 5.0%, now stand at 4.1% and 3.9%, respectively.
Since the Fed started hiking in 2022, investors have rushed to investment opportunities in short-term credit, bringing total assets to near $6.0tn. Attractive yields and capital safety served as major reasons for investor appeal. However, it must be noted that short-term credit carries a significant reinvestment risk with it. Once the Fed and ECB start cutting rates, yields on fixed income instruments are likely to decline, leaving investors with lower yields to reinvest their money in after original contracts mature. Indeed, 2-year and 10-year US Treasury yields are forecasted to reach 3.7% and 3.8%, respectively by 2024 year-end. Therefore, it is probably a good time to lock in high yields on mid and long-term fixed income securities.
