The short end of the yield curve remains punishing for investors. Yields on two-year notes are now below the lows reached at the height of the financial crisis, and five-year notes yield a scant 1.68%. Going out longer on the yield curve still isn’t an answer to paltry yields, though. Long bonds are significantly overvalued from both long- and short-term perspectives.
The low level of Treasury yields is both frustrating and maddening.
Policymakers are attempting to recapitalize the banking system by engineering a steep yield curve. The Fed has essentially lowered the risk-free interest rate to zero. The losers in the scheme are the savers and retired investors who depend on full-faith-and-credit short-term Treasuries and CDs to fund living expenses.
Fortunately, there are still opportunities to pick up decent yields in investment-grade corporate bonds. The big down-tick in Treasury yields has not been matched by an equal down-tick in investment-grade corporate yields. In other words, spreads have widened, allowing you to pick up additional income without reaching for yield in long bonds or low-quality credits.
Jeremy Jones, CFA
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