The State of Rates and the Bond Market During Uncertainty

KATHY JONES: I'm Kathy Jones.

LIZ ANN SONDERS: And I'm Liz Ann Sonders.

KATHY: And this is On Investing, an original podcast from Charles Schwab. Each week, we analyze what's happening in the markets and discuss how it might affect your investments.

Well, hi, Liz Ann. It's been another busy week. The market's all over the place, up, down, and sideways, but I guess predominantly down with the occasional crazy rally in the middle. What do you make of this?

LIZ ANN: Well, you're right. You'll remember it was just two weeks ago, I guess, literally on that April 9th day where, based on the delay of the reciprocal tariffs, the market actually had from intraday low to high had about a 12 or 13% rally in one day, closed up close to 10%.

And it was just prior to that that we were all on stage. And I talked about that this is the kind of market where you can get rip-your-face-off rallies. And I didn't know that 15 minutes after we got off stage, that's what happened. But you do need to be prepared for that. Today is maybe not quite a rip-your-face-off rally, but maybe rip-your-ear-off kind of rally. And they can happen literally on a dime. And in this case, I think there's so much itchiness on the part of markets, certainly the equity market for any semblance of good news. Today that wasn't really news per se, but maybe suggestions that Treasury Secretary Bessant made. Interestingly, and apparently a private meeting, which you and I were having an exchange beforehand. I'm not sure I remember there being a lot of those with a sitting Treasury secretary and a publicly traded but private-sector company.

KATHY: Actually, Liz Ann, I looked it up and I could not find one in recent times. Certainly they do a lot of that after they leave the Fed, and that's a great source of revenue for them. But it's not customary. I don't think there's a rule against it, but it's not customary to do a private event closed to the public and the press while serving as Treasury secretary. But, you know, be that as it may, I don't think he's saying anything he hasn't said before.

LIZ ANN: No, he didn't, just that there may need to be some de-escalation with China, without specificity as to what that would resemble. But I think there's enough of a desire on the part of the equity market to find anything to hang its hat on. Plus you get to these oversold short-term technical levels and the recent downturn in the market, actually the underlying action of the market, some of the breadth measures, did not look super ugly like was the case at the low that preceded that April 9th rally day, so today as we're as we're taping this is a good day, but we're taping this on a Wednesday and we drop on Friday, so a heck of a lot can happen between now and then. 

I think the other force at play in the equity market though, maybe not on a day like today, is that we're in the teeth of earnings season. And this is not going to be much of a tell from an earnings season perspective on forward guidance with specificity, because a lot of companies are either just withdrawing guidance or to some degree just, you know, tossing their hands up and saying, "We just really don't have a lot of idea. We can, you know, talk about base case, kind of the pre-escalation of the trade war base case, and then maybe what worst case scenario would be under a recession-type scenario, but we're still in a move down in terms of earnings estimates." 

So we have this, we've talked about cross currents a lot in terms of some of these policies, but there's also cross currents, even from an earnings and valuation perspective, because in the midst of a correction, you see an improvement to valuations, which has been the case since the mid-February high. But at the same time, valuation is measured by a P/E ratio on a forward P/E basis, the price to earnings, the earnings is the denominator, and that continues to fall, particularly for 2025 consensus estimates. So prices coming down puts downward pressure on valuation.

All else equal, a good thing, but the falling earnings puts upward pressure on valuation, not a great thing. So those are some of the cross currents. Maybe a little bit of calm in your world, at least today, and maybe the equity market is taking some solace in that, but what do you think about on a day where we're not seeing massive volatility in the fixed income side of things?

KATHY: I think, "Oh thank goodness, I get a break, you know, for a minute or two." But I think something that's happening that not everybody picks up on is the bear steepening of the Treasury yield curve. And all that means is, this is jargon for long-term rates are moving up relative to short-term rates. So that gap between say, you know, three-month T-bills and 10-year Treasuries or two-year notes and 10-year Treasuries is widening.

That's happening when, in general, rates are moving up. So that's why it's bearish, and it is a steeper yield curve. Gotten questions on that from a couple of people saying, "Well, if the risk of recession is rising, and we're worried about growth slowing down, shouldn't the yield curve be going the other way? Shouldn't long-term rates be coming down relative to short-term rates?" And I think the answer lies in a couple of things. One is that we have this issue from the start of sequencing. First, are we going to get tariffs and then slower growth? Or are we going to get slower growth and then tariffs? How is that sequence of events going to play out, if it's going to play out? So that's a big question. But I think the market is now looking at the risk that the inflation persists longer.

And a second thing is the term premium, which is again, for people who don't travel in this space and pick up on the jargon all the time, the term premium is just that extra yield investors demand to invest in bonds for longer term versus staying in short term. So you can either buy three-month T-bills and just keep rolling them over for the next 10 years, or you can buy a 10-year bond. Usually if you're going to go out and buy the 10 year bond, you're going to ask for some extra yield because you're locking up your money for that time period, and actually the term premium, we kind of throw all the stuff we don't understand into it, but it usually reflects a lot of uncertainty about the path of inflation, the path of economic growth, the path of Fed policy, supply and demand issues in the market. And right now we've got a lot of that uncertainty. 

So that term premium, that risk premium, is expanding because people just have no clear vision as to where we're going and how we're getting there in terms of all those factors. And they're worried, obviously, about all of those factors and possibly expanding. So even though things have been pretty calm, below the surface, things are moving in the Treasury market. And we're all just kind of sitting and waiting for the next piece of news to give us some guidance. In the meantime, you know, the economy continues to show signs of slowing down, but inflation continues to be kind of sticky where it is. So betwixt and between, again, and just a lot of volatility and a lot of internal commotion.

LIZ ANN: All right. Let's talk about another subject here because it's had implications in both of our worlds and certainly was part and parcel of some of the very recent weakness, notwithstanding the strength today, which is, I'll state it broadly, threats against Fed independence and some of President Trump's vitriol against Chairman Powell. So what do you make of that?

There still seems to be a debate as to whether there's the legal authority on the part of an administration to do that, but it certainly rattled investors in the heat of it. What are your thoughts?

KATHY: Yeah, I think there's, you know, the third rail in the market is central bank independence. And there's a good reason for that. When you have central banks that can counter what might be happening in the economy and be free to do that, do unpopular things like raise rates when the economy is overheating, then you have that balance in the market, and people rely on the central banks to do those things.

So President Trump sees it differently. He has expressed that he should be able to weigh in on Fed policy, that he has vast experience as a real estate investor and therefore knows all about interest rates. And I think his style of management is command and control. And it probably frustrates him greatly that he does not have control of this element. And he's expressed that pretty openly, along with, as you say, some vitriol aimed directly at Fed Chair Powell. Powell did his most recent public appearance. He actually kind of laid out why the Fed was not lowering rates right now. And I think that included the uncertainty about tariff policy. So what he said was, you know, the Fed has been looking at tariffs. Obviously, they've been trying to model what the impact might be. And then therefore come up with a new forecast for what inflation will be, growth will be, and what the policy rate should be. 

Having done that work, then the tariffs that were announced were much greater, much larger than what they had modeled. And so they're back to the drawing board and saying, "Well, if indeed …" and that's a big if, right? "If indeed we get these tariffs, 10% minimum and 25% on this, that, and the other thing, and 200% on China and etc. Well, then the impact is much different and much greater. So now we have to go back, see what we end up with, then figure out what we need to do." So in the past the Fed has quote-unquote "looked through" things like this to say, "OK. It's a one-time price increase, but tariffs do tend to slow down economic growth. So we look through it and we take it in stride." This time they don't have that confidence. 

A, because inflation's still above their target and moving sideways instead of lower. So they're not quite at target yet. B, they were just highly uncertain what the tariffs will be, when they'll be implemented, and how long they'll be in place. So very difficult to come up with a forecast for the economy or for inflation based on that. And C, the unemployment rate is still relatively low. And I think we all expect it to go up as a result of all these different things going on, but it's still relatively low, hovering just over 4%. So there's no urgency right now for the Fed to make a move. And having been criticized for being too late to raise rates during the COVID bout of inflation, I think this Fed is very sensitive to making that mistake again. 

So there's the conundrum, right? Powell has his point of view, and Trump is threatening to try to replace him or says he wants to replace him. As you say, it's not clear that he has the legal right to do that. I'm sure it would be tested in the court. The second thing is, Powell's only one of many members of the FOMC, so he'd probably have to get rid of six or seven people to get what he wants. I don't know. 

LIZ ANN: Not only that, but let's just assume, which I don't think is a safe assumption, that Powell or somebody else put in at the helm of the Fed would decide to lower rates. Again, I don't think Powell's going to do that by virtue of political pressure. Also a relevant question is, "How does that help?" We're not talking about an economic problem as a result of severe strains in credit availability or significant plumbing problem in the financial system or rates having been too high and constraining activity. So I'm not sure a 25-basis-point cut in the fed funds rate solves the issue of uncertainty tied with to the trade war.

KATHY: And actually, it might hurt. My sense is long-term rates would actually move up because A, you're kind of removing that pillar of Fed independence, which makes your bonds much riskier, the longer-term bonds much riskier. You're probably opening the door to a more inflationary time period. That makes longer-term bonds riskier. And foreign investors, who have already been starting to move elsewhere, would probably say, "Oh forget about it," and we'd probably see the dollar go down. So I think it actually would backfire if it were done as Trump has indicated he would like to do it. It just creates another level of uncertainty and another pain point for the market that investors just can't get past. So they're just stuck, and I think yields are elevated and likely to remain elevated until we have a clearer path forward or we actually hit a real downturn in the economy, and then we're going to see yields come down.

LIZ ANN: All right, so Kathy, you're in the hot seat again in terms of our guest, and we're focusing on rates and fixed income this week. So tell us about our guest.

KATHY: Well, sure. It's my colleague, our colleague, Collin Martin, who you know quite well. Collin's a director, and he holds a Chartered Financial Analyst designation here at the Schwab Center for Financial Research. His focus is on taxable credit markets. So Collin's a frequent guest on Bloomberg TV, Yahoo Finance. He's been quoted in all kinds of financial publications, including The Wall Street Journal, and Reuters, and MarketWatch.

Collin, thanks for being here.

COLLIN MARTIN: Thank you for having me. There's so much going on in the bond market, so I'm really excited about this conversation.

KATHY: Yeah, I am and I'm not because I feel like by the time we finish it, everything will have changed. But I wanted to start out with one observation that I just made this morning, is that for all of the back-and-forth that we've had in the markets, in actual fact, 10-year Treasury yields, which is what the administration says they're focused on, have not changed all that much since the start of the year.

And even since so-called "Liberation Day," when the tariffs started, yields are pretty much kind of close to that 4.28%, 4.29%. So the one-year average is about 4.25%, and since the announcement of tariffs, the 10-year average yield was at that point about 4.29%. And we're kind of hovering right there right now.

We've traveled up, we've traveled down, but we're back to square one if you want to call it that. So what's your take on this right now?

COLLIN: You know if someone decided to kind of take the last three weeks off, take a little sabbatical, turn off the phone, you might not think anything happened when you look at the Treasury market. But there was a lot of activity between now and April 2nd. So even though yields, at least intermediate and long-term yields, are pretty close to where they were in early April, it was a wild ride to get back to where we are now. You know, we initially saw Treasury yields fall pretty sharply when the tariffs were initially announced, which I think makes a lot of sense. When you think about U.S. Treasuries, they're high-quality investments. They're perceived to be safe-haven investments. So when we saw that big stock-market decline, we saw Treasury yields fall pretty sharply, again, as expected. So people want the safety, perceived safety, of Treasuries, that pushes their prices up and their yields down.

But then within a couple of days, that kind of reversed a little bit. And I think that's what caught a lot of investors off guard, where, yes, we're back very close to where we started, but we saw yields …  I mean, the 10-year yield that you alluded to, we saw it rise by about 50 basis points in the matter of a couple days. So Kathy, let's talk about that a little bit. That's, I think, the number one question we get. So let's just kind of get right to it. What drove that move up so sharply?

KATHY: Well, I think the proximate cause was the indication from the president that he might want to replace Fed Chair Powell. And he's since backed off from that position. But that gets to the heart of the structure of the Treasury market and the underpinning for the financial markets in general. So an independent central bank, really, really important in terms of the financial system, the integrity of our policy and of our system. And when he made a lot of remarks indicating that he'd like to replace him, that he thinks he's not doing a good job, and that Powell should be lowering interest rates, we saw bond yields really rise very sharply because it seemed like that was a possibility.

And as everybody knows, you need that separation between the politicians and the central bank when setting policies so that the policy can basically counter what the politicians do from time to time. So that was the proximate cause, I think. And we saw the dollar really come down, yields go up. I … some evidence that we've seen foreigners moving ashore. I don't know that it's been a huge amount, but enough evidence that investors are … and long-term investors, not just hot-money traders, but long-term investors sort of looking at that and saying, "You know, maybe we should look elsewhere." 

So Collin, you know, we have been expecting a couple of rate cuts, nonetheless, aside from all this business by the Fed by the end of the year. I'd be curious, have you changed your mind about that, or do you think that that's still a reasonable expectation?

COLLIN: You know, I think it is a reasonable expectation, but so much has changed since we came out with our 2025 outlook. And right now, I think the Fed is in a pretty difficult situation. And I say right now, actually, I think they'll be in a more difficult situation as we get more data about the impact of the tariffs. Because if we look at what the Federal Reserve does and what its mandate is, it has a dual mandate of maximum employment—that's another way of talking about the labor market—and price stability, which is another way of talking about inflation. And given the potential impact from the proposed tariffs, that can keep inflation relatively high. It's already been a little bit sticky. We expected it to come down over time. 

But tariffs should raise prices to some degree. How much it raises prices, we don't know, what the longevity of that is. At least over the short run, it has an inflationary impact. But uncertainty can impact business decisions, business spending, business investment, and that can result in potentially a weaker labor market. So you kind of have these diverging paths where higher inflation would support the case for the Fed to hold rates higher for longer, or if it got really out of control, maybe even raise rates, but that's not really our outlook right now. But if the labor market weakens or deteriorates, and especially if it deteriorates significantly, that supports the case for rate cuts.

So you have these diverging paths, and I think it puts the Fed in a really difficult position. Now, what we know right now is that they seem to be focusing more on the inflation mandate, as opposed to the labor-market mandate. And we've gotten a lot of comments from officials over the past few weeks, specifically after the tariffs have been announced, about the inflationary impact that they could bring. We've heard from Fed Chair Powell himself that the tariffs were more than they anticipated.

So that supports the case for inflation to be a little bit stickier than expected. So they seem to be pushing back on the idea that we're going to get imminent rate cuts or more than we expected, or more than the markets are expecting. But I would add that that sounds good for now. But if we were to see the labor market weaken significantly, I think that could change their plans a little bit. But I think that can take time. I think it'll take time for that to happen. As it stands now, the data we're seeing supports the labor market's doing OK. You know, it's not doing great. I mean, the unemployment rate is higher than where it was at its low in 2023. But then we're seeing some good things with initial jobless claims have come down a little bit. We're still seeing payroll growth, not at the rates we saw over the past few years, but we're still seeing rising payrolls as opposed to shrinking payrolls. So that's the good news. But if that were to change, then the focus from inflation could shift to the labor market, but again, I think that could take some time.

KATHY: Yeah, I agree with you. I think they would respond. I think the Fed would respond to rising unemployment because that is part of their mandate. But until they actually see that happen, it makes sense to stay on hold because inflation is sticky. And if you annualize what we expect to be the impact of tariffs, it's going to raise inflation above probably 3%. 

I mean, the Fed's always in a tough place, right? We say that a lot because no matter what the circumstances, there's always decisions to be made that aren't easy. But I think in this case, they would respond to a deterioration in the labor market and in the overall economy and try to look through the impact of tariffs. But not an easy thing to do because you have competing narratives there about the economy.

COLLIN: Yeah, and Kathy, one thing I think to highlight is, given kind of the diverging ways that they could go, I don't know how much of that is an interest-rate issue as opposed to a policy issue. 

KATHY: Oh true, yeah.

COLLIN: If inflation stays elevated or increases because of tariffs, the Fed can't change that. 

KATHY: Can't control that, yeah. All they can do is slow down the economy and slow down the demand side, which, inevitably, it's probably going to slow down anyway because of tariffs, yeah. So I want to, though, ask you, because we get frequently asked questions for us, or about, "OK, we get this picture. There's a lot of volatility, but overall, you know, someday the Fed's going to lower rates, but for now they're on hold," right?

So people will ask us, "Well, what should we do?" And let's take a couple of different cases. Let's take somebody who's in retirement, has a pretty sizable allocation to fixed income because they need the income generated from the bond market. We have been advocating a kind of intermediate term, average duration, and higher credit quality. If you're in retirement, does that still makes sense to hold a good portion of your portfolio in that way?

COLLIN: I think it does. When you're thinking about how to invest in the bond market and what sort of maturities to invest in, especially when you're in retirement, you need to think about the risks to both sides. If you're in retirement and you're focusing too much on short-term investments, whether that's Treasury bills or money market funds or very short-term CDs, that brings reinvestment risk into the equation if the Fed does eventually cut rates, because those … the income earned on those sort of investments are highly related to that fed funds rate. So as the Fed cuts rates, we'd expect the rates and the yields and income paid by those investments to decline as well. So we always caution against that as well. But we don't say investors should take too much interest-rate risk or focus too much on long-term maturities because that tends to result in much more price sensitivity, large price fluctuations, and all else being equal, the longer the maturity of a bond, the more sensitive it is to fluctuating interest rates. So if you have very long-term investments and yields rise, we wouldn't want someone in retirement to suddenly see a big drop in the value of their assets, because that'd be a bad thing. In case something happened, you needed to sell a position for whatever reason, that would be a bad outcome. 

So as you mentioned, Kathy, just focusing on intermediate term, I think, is a good kind of neutral happy medium outlook that allows investors to earn what we still think are pretty attractive yields right now. Depending on how much credit risk you're willing to take, you can get yields in the 4% to 5%+ area and get more steady income that way versus more of a short-term strategy that can ebb and flow based on the direction of Federal Reserve policy.

KATHY: OK, let me give you another case. How about somebody who's not yet retired but is probably planning to retire in the next two to five years? Would you have the same suggestion for the way to structure a portfolio? Or would you be not willing to have as much fixed income? How would you think about that?

COLLIN: Well, you know, I'll add that every client's different. Every investor's different, of course. But if you have a little bit more time, that does support the case for a little bit more risk. But if you're pretty close to retirement, I think you really want to focus on protecting those assets. So yes, maybe you hold a few more risky investments than you otherwise would in retirement, knowing that you have a few more income-earning years where you can kind of build to your portfolio.

But if you're close, I still think you want to be trying to focus on how that fixed income will look once you get in retirement and how you'll be positioned once you get there. So I think the case can be made still for intermediate-term holdings, because again, if you're holding a lot of cash, cash alternatives, things like that, it's a very short-term outlook. So if you have a few years to retirement, you probably don't want to have things that are very earmarked or focusing on … it's a short-term holding. You want to focus on things that can earn more yield or better potential returns over longer holding periods.

KATHY: Right, yeah, I definitely agree because as you get close to retirement, it's probably even more important to protect your assets, you know, because your ability to add to those assets may diminish quite a bit once you stop working, stop drawing a paycheck. And then finally, say you're just a younger investor, and by younger I mean, you know, below 60, you know, not near retirement. Are you willing to be a little riskier, maybe have some high yield, maybe keep the duration shorter and manage the duration a little bit more actively, or how would you think about that?

COLLIN: Yeah, I think that's a good way to frame it. If you have more time, if time is on your side and you have a long runway before retirement, that supports the case to take more risk because you can ride out those fluctuations. So whether that's with more stock holdings, I know that's a little bit out of our purview, but I mean, over time, stocks tend to generate higher total returns, but they come with a lot more volatility. Same thing with riskier parts of the bond market, whether it's high-yield bonds, preferred securities, things like that, or even long-term bonds, like you said, a high-quality Treasury with a 30-year maturity can be considered risky over the short run because it can have really wide price fluctuations. But if you have a longer timeframe, you can ride out those ups and downs, then I would say that does support the case to take a little bit more risk, knowing that if something goes wrong—let's say the economy slows more than expected, and we see a decline in the prices of riskier assets—knowing that you don't need to sell those right now to fund your retirement or to earn income to pay your bills, then yeah, you can hold those in moderation knowing that over time they should produce those higher returns.

KATHY: So speaking of credit risk, let's go to your area of specialty, corporate bonds. So we've been pretty favorable towards investment-grade corporate bonds for quite some time. And those yields are looking pretty attractive these days. The stock market's down, but well, any given day it's back up. But there have been concerns about earnings going forward, what tariffs will do to various parts of the market and the overall economy, along with some of the spending cuts coming out of Washington. So when you add all that up, is it time to dial back on credit risk? Or are you still OK with investment grade but still cautious on high yield? How would you think about that in terms of the credit side of a portfolio?

COLLIN: We're still pretty comfortable with investment-grade corporate bonds, and we're still a little bit cautious on high-yield corporate bonds. We talk about investment grade versus high yield. We're just looking at what the credit ratings are of those bonds. So investment grade is as high as AAA down to BBB. But within that investment-grade corporate bond universe, so specifically with corporate bonds, most of the bonds that are investment-grade rated are single A and BBB. So they're more modest to moderate credit risk versus more low credit risk, which would be AAA and single A. But we're still comfortable with taking on the credit risk of investment grade corporate bonds right now because coming into the year, we think they were on pretty strong footing, kind of from an aggregate, tops down look. Balance sheets were really strong. 

So if we were to get some sort of hiccup with corporate earnings or corporate profits, we think a lot of highly rated corporations would be able to withstand that because they would have enough liquidity on their balance sheets in case there was the hiccup that I just alluded to. And we think the yields are really attractive. You can get average yields depending on the credit rating, you know, if you're looking at A to BBB, and you're focusing on kind of that intermediate term part of the yield curve, maybe five to ten years, you can get yields in the 5 to 5.25 maybe 5.5% credit yield area, again depending on what the maturity is, depending on what the actual credit rating is. 

But we think that's pretty attractive, especially when we're looking at tax-advantaged accounts. So if this is in an IRA, 401(k), something like that, where taxes are not an issue, we think those are pretty attractive yields considering where we've been over the past 15 years or so. They're not necessarily at their highs that we saw in 2023, but they're still pretty high relative to the past 15 years. So I think that's a really key point to focus on. Now there could be volatility. We could see potential price declines. One thing we look at is how much extra yield are investors earning to invest in or lend to corporations of various credit ratings. With highly rated, with investment-grade-rated corporations, credit spreads are a little higher than 1% right now, meaning more than 1 percentage point above comparable Treasuries. 

They were closer to 70 or 80 basis points earlier this year. So the relative attractiveness has gotten a little bit better. But when those spreads move in the secondary market, the value of those corporate bonds can move as well. So I think I would just make sure that if you are considering investment-grade corporate bonds in the secondary market, they still can fluctuate. And if we get more uncertainty as a result of tariffs, or we start to see some data that shows things are slowing down a little bit, maybe we see corporate bond prices fall a little bit relative to Treasuries, but we don't think that the decline would be relatively large. 

If we compare that, though, to high-yield bonds, we're a little bit more cautious there. High-yield bonds have credit ratings of BB or lower. They're also called junk bonds or sub-investment-grade bonds. They have a lot more risk with the issuers. The issuers tend to have a lot of debt relative to their earnings, more volatile cash flows. So if we get an economic slowdown, or corporate profits are a bit challenged, they might have more of a difficult time paying their bills, paying their debt as it comes due. And they tend to be highly correlated to the stock market. I think this is a really key point to make, where if we get this volatility we're seeing with stocks or potential stock market declines, you tend to see high-yield bond market declines as well. 

Now, the yields they offer, are relatively high. On average, we're looking at about 8% or more when we look at the Bloomberg Corporate High Yield Bond Index. But a lot of that, about half of that yield, is really just from Treasuries, and half of that yield is the credit risk premium, the extra spread you get. We'd prefer to see higher spreads to compensate for those risks. The level of extra yield that we're earning today with high-yield bonds, it's still below the long-term average. And I just think that's not enough given all the uncertainty out there. And if we were to see an economic slowdown or larger stock-market declines, we'd probably see those spreads rise up and pulling their prices lower. So we're a little bit cautious there. 

If you're a long-term investor, so kind of going back to our discussion about your timeframe, how much time do you have until retirement? Can you ride out the ups and downs? If you have a long investing time horizon, then I think you can consider high-yield bonds in moderation, because over time they do generate pretty high returns with a lot of volatility. If those relative yields, if those spreads do rise, and they get to, say, 5 or 6% or more, then I think it'd be even more attractive for people who right now aren't looking to take a little risk, but at some point, we think the yields would get attractive enough that we think a larger swath of investors can start to consider that. But for now, we're still a little bit cautious, and if you are considering high yield, make sure you're a long-term investor and be willing to ride out those ups and downs.

KATHY: So Collin, one more area that I think is interesting to people right now and has been interesting for quite some time because of inflation is Treasury Inflation Protected Securities, otherwise known as TIPS. These are bonds issued by the Treasury that are indexed to CPI. And that's the overall CPI, meaning the one that includes food and energy, which I think is important because oftentimes when we get inflation, we often can get it in food and energy, and when it's excluded from the index, it feels somehow like you're being robbed. But be that as it may, it's been an area that people have been really focused on because of the recent history of high inflation, the uncertainty as to whether we're going to get inflation to come back a bit from here. How does that market look to you right now?

COLLIN: Yeah, the TIPS market I think is pretty attractive, and it's something that is probably overlooked. It's kind of a niche market. Like you said, they're Treasuries, but they're indexed to inflation. The TIPS market is much smaller than the traditional Treasury market. But the key benefit is that characteristic of being indexed to inflation. So as inflation rises, and as measured by the CPI that you mentioned, the value of the TIPS rises as well. So it's a great way to keep pace with inflation because very few investments offer that sort of benefit. And then as the principal value of a TIPS rises, the coupon rate is based off of that rising value. So you can actually see your income payments, or coupon payments, rise as well in an inflationary environment.

Now, there are some risks because they are still bonds. They're still Treasuries and their prices can fluctuate in the secondary market. I think that's what catches a lot of investors off guard. So you buy a TIPS, you're ready to be protected against inflation. And then all of sudden, let's say yields rise and the price of that TIPS falls, you can actually see the value of your holdings decline. I think that catches people off guard. But if you hold individual TIPS, and you hold them to maturity, we think they're one of the best ways to protect against inflation, especially today because of the yields you offer. If we look at TIPS yields, so on average if you look at five-to-10-year TIPS, you probably get yields in the 1.5% to 2% area. Those are real yields, or inflation-adjusted yields, meaning it's what you'll earn above the rate of inflation. So if you're looking to protect against inflation or beat inflation, you can buy TIPS right now and hold them to maturity.

And that yield kind of shows you how much you'll outperform inflation by over that holding period. So I think it's an interesting investment today given that inflation is on so many investors' minds.

KATHY: Yeah, I think, though, one distinction that we always like to make is the difference between holding TIPS, individual TIPS, to maturity and buying them in a fund or an ETF. Because sometimes because of the way those pooled assets, those pooled funds, are managed or the way they're constructed, you may not get the same performance. So in some ways, if you really want to have that expectation of what you're going to get, the individual TIPS may be a better choice for a lot of people.

COLLIN: Yeah, I think that's a great point. And that could be a topic for another discussion, but just the idea of individual bonds versus a bond fund, a lot of the times it depends on investor preference. And how do you handle price declines, potential price declines, in a fund where you kind of see one net asset value, but you don't know what's going on behind the scenes, versus a decline maybe in your individual bond holdings, where you can see the stated maturity date, and you can kind of look through that price decline, know that you'll be paid back at par, barring default, of course.

KATHY: Well, this has been great. We're going to probably have our colleague, Cooper Howard, on one of these days to discuss the municipal bond markets, one area we didn't get to today. But he does publish a lot on that as well. And I will note that back in December, we did an On Investing podcast about how to build a bond portfolio. So if you missed that one, or you're new to this podcast, try and go back to December and look at that one because it has some useful information for people who are constructing bond portfolios for themselves or working with someone else, but they want to get better educated on the topic. 

So Collin, one last question for you. What's one general thing that you would tell an investor who is starting to look at the bond market? I'm just always curious, what's the one little piece of advice that you think is really important?

COLLIN: One piece of advice? Focus on the yield of an investment, the yield that's being offered by an investment or the income that's being offered, and understand how a time horizon plays into that. So for example, if you buy an individual bond, and it has a stated coupon rate, a stated yield, from when you buy it to when it matures, the price can fluctuate a lot, but barring default, it'll be repaid at maturity. Most of your return, almost all of your return, would come from that coupon payment. You translate that to funds, which I think this is what confuses a lot of investors, over time, most of the return comes from that income payment you receive. So I think the idea of yields rising and prices potentially falling or yields rising and investors saying, "You know what, should I wait for a better opportunity?" If you think the yields are attractive now, and the income you can earn on bond investments are attractive now and can help you reach your goals and help you make it to retirement, live in retirement, then I think there's a great opportunity there. As long as you understand that you need to hold the bond investments for a long enough time to get the benefits of those income payments.

KATHY: That's a great point. Most of what you get out of bonds is income. And all income is positive. So your chances of a positive return are pretty good if you hold it long enough to earn the income. So there we go. OK, thanks a lot, Collin. Great talking with you.

COLLIN: Thank you for having me.

LIZ ANN: So Kathy, in terms of upcoming economic data, of which there is a boatload, what are you going to be watching for or keying off of as we head into next week?

KATHY: Yeah, there's so much on the calendar. I guess that the highlights from me, the Fed will release the Beige Book Wednesday, before we post this interview. So I'm curious to see. The Beige Book is their summary from the various district banks as to how the economy is looking. It should be interesting reading. Then of course we get the weekly jobless claims as well.

And then we get into a whole raft of things that I think the most important of which will be, of course, the price indices. So the PCE index, that is the Personal Consumption Expenditure deflator price index, that's the one that is most closely followed by the Fed. And we'll get an unemployment report, obviously very important to both the markets and the Federal Reserve. So we've got a lot of data coming up. What about you, Liz Ann?

LIZ ANN: Yeah, in fact, not just next week, but we have some coming in between as we do this and the dropping of this episode. So we have the S&P Global version of the Purchasing Managers Indexes. And those are increasingly interesting in part because they typically share verbatims from companies, both on the manufacturing side of the economy, on the services side as to how they're thinking about the economic backdrop and how they're trying to navigate it.

So that in conjunction with what we're going to be hearing, continue to hear from companies in earnings season. So that's always top of mind when we're at this point, and we really are in the teeth of earnings season now in the next week or two. We also get what's called the Job Opening and Labor Turnover Survey data, the JOLTS data, which includes job openings and the quits rate as well as layoff announcements. And it lags other labor market data by a month. So it might not be fully reflecting a lot of this recent turmoil, but I think that will continue to be top-of-mind. And then we start to get the Institute for Supply Management version of the PMIs later next week, so to see whether that aligns with S&P Global's version. So those are what's on my radar.

So that is it for us this week. Thanks for listening, as always. You can keep up with us in real time on social media. I'm @LizAnnSonders on X and LinkedIn. Those are the only two platforms I'm on. So I continue to have a lot of imposters. Make sure you're following the actual me.

KATHY: And I'm @KathyJones—that's Kathy with a K—on X and LinkedIn. You can always read all of our written reports, including charts and graphs, at schwab.com/learn.

LIZ ANN: And if you've enjoyed the show, we would be so grateful if you'd leave us a review on Apple Podcasts, rating on Spotify perhaps, or feedback wherever you listen. And we do appreciate everyone who has left us a review so far. We love seeing those, and we will be back with a new episode next week.

KATHY: For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.