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A surge in short-term Treasury yields could make some investors consider adding bonds to their portfolio. The 2-year Treasury yield topped 3.9% on Friday, the highest level since 2007. Bond yields vary inversely with their prices. The two-year bond is at the point on the Treasury yield curve that is most sensitive to rate hikes by the Federal Reserve, which is expected to raise rates for the fifth time this year next week to curb inflation. In August, the consumer price index rose by 0.1%. Economists polled by Dow Jones had expected a decline of 0.1%. With the yield curve inverted, short-term notes now have a higher yield than long-term notes. Bond King Jeffrey Gundlach, CEO of DoubleLine Capital, said in a webcast Thursday that after some brutal years, the bond market is now in perfect shape. “The opportunities are now more exciting than at any time, in my opinion, in the last 10 years,” he said. Gundlach’s firm bought long-term Treasuries last week. CNBC’s Jim Cramer, on the other hand, bought 2-year Treasuries this week for his personal portfolio. For the first time in a long time, returns are more competitive with stock returns, he said. With short-term notes, investors can get high returns without long-term commitments. For those who want to get some of the action, here’s what you need to know. Buying from the Government You can buy Treasurys directly from the US government through its TreasuryDirect.gov website. You will need to create an account and link your bank to the website. The notes are sold in increments of $100 and are usually released within one week of the auction date. Auctions for 2-, 3-, 5-, and 7-year Treasury bonds take place every 4 weeks, and auctions for 10-year bonds take place quarterly. Buying banknotes simplifies income planning. “If you buy individual Treasury bonds and hold them to maturity, you know what your interest will be and you know what your cost to redeem is,” said Chartered Financial Analyst Tim Uteht, chief investment officer of Life Planning Partners, based in Jacksonville. , Florida. “You know exactly what you’ll get.” You will earn interest twice a year, and if you hold Treasuries to maturity, you will not be affected by market risk. The downside to owning securities instead of investing in a treasury fund is the lack of diversification, unless you’re into bonds yourself. You also need to make sure you’re buying the right Treasuries for your goals and time horizon. Investments are also separate from your other accounts, says certified financial planner Dianne Lassus, managing director of Peapack Private Wealth Management in New Providence, NJ. “For people who want to see everything together, it’s a bit more difficult,” she said. You also can’t buy them from an IRA or Roth IRA, which Lassus says is the biggest downside. If you want to sell a bond before it matures, you cannot do so on the government’s website. Instead, you will have to transfer it to a bank, broker or dealer. Buying Through a Brokerage Company You can also purchase treasury bonds in the secondary market through a brokerage firm. You still get all the benefits of direct security ownership. For Utech, this is the easiest way to buy bonds, calling the government website “a bit cumbersome.” Online brokers like Fidelity and Charles Schwab have tables that list the yields of various Treasury bonds so you can compare products, he says. In addition to bonds on the secondary market, both Fidelity and Schwab sell new issues of Treasuries. Also be aware that you may not get an accurate time horizon on the note for any secondary Treasury purchases, Utech said. Be sure to check any minimum purchase requirements and associated fees. At Schwab and Fidelity, for example, you can buy Treasurys online for free, but a deal with a broker costs $25 and $19.95, respectively. At Fidelity, the minimum purchase of treasury bonds is $1,000. What Lassus loves about brokerage, she says, is that you have the option to pool your investments and even add them to an IRA or Roth IRA. Investing in a fund You can also access the bond market through mutual funds and exchange-traded funds. “This provides immediate diversification,” Lassus said. For example, a fund of short-term treasury bonds may have issues with maturities ranging from one to three years. You can buy them through your broker, which can also make it easier to track performance along with the rest of your assets. See below for four short-term treasury funds. However, funds can be hit by price fluctuations in a year like this and you have the potential for losses. Also, income payments can fluctuate because you have different bonds in the fund. Be aware of any fees that may reduce your earnings. Funds also have a turnover and are therefore subject to capital gains tax, unlike individual bonds.
Credit: www.cnbc.com /