Volatile Bond Market Signaling Changes to Economy

MIKE TOWNSEND: The bond market is usually the sleepier side of the market. It has always attracted investors who are looking for stability, security, and a lower risk profile as a part of their portfolio.

But what happens in the bond market isn't just important to bond investors―it has real implications for equity investors and for the economy in general.

And over the last few weeks―and really over the last year-plus―the bond market has been anything but sleepy. We've seen volatility in bonds in recent weeks that hasn't been seen in decades. So what's going on?

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.

In today's episode, we're going to take a closer look at what's happening in the bond market, which has been…well…really weird lately. Collin Martin, fixed income strategist at the Schwab Center for Financial Research, will join me in just a few minutes to talk about how the bond market is reacting to the Federal Reserve's actions, the turmoil in the banking sector, the looming debt ceiling fight―and where there might be places for investors to take advantage of opportunities.

But first, a quick update on some of the issues making news in Washington right now.

At the top of that list is the fallout from last month's turmoil in the banking sector. Last week, regulators from the Federal Reserve, the FDIC and the Treasury Department spent two grueling days testifying before Senate and House committees. They responded to a barrage of questions from across the political spectrum about whether they were too slow to respond to warning signs before the collapses of Silicon Valley Bank and Signature Bank, the second and third largest bank failures ever.

Democrats on Capitol Hill argued that tougher regulation is necessary, while Republicans focused on whether regulators could have responded better to the crisis with the tools they already have. Republican Senator Tim Scott of South Carolina, the top Republican on the Senate Banking Committee and a likely 2024 presidential candidate, said during the hearing that "our regulators appear to have been asleep at the wheel," voicing a common refrain from Republicans during the two days of hearings.

But regulators pushed back. Fed Vice Chair for Supervision Michael Barr blamed extraordinary mismanagement at Silicon Valley Bank, saying that it failed to appreciate the risks of rising interest rates to its business model and that Fed supervisors had been warning the bank's executives for months that it had concerning issues.

Well here are my four big takeaways from the two days of hearings.

First, enhanced regulation of mid-sized banks―it's coming. All three regulators who testified agreed that stronger rules are needed for banks with between $100 billion and $250 billion in assets―a range that included both Silicon Valley Bank and Signature Bank before they collapsed.

Some are pointing the finger at Congress for creating this situation. Under the Dodd-Frank financial regulatory overhaul law that was passed in the wake of the 2008 financial crisis, banks with $50 billion in assets or more were subject to tougher regulation. But Congress eased some of those regulations on banks between $50 and $250 billion in assets in 2018. The decision to do so received bipartisan votes in both the House and Senate at the time. And the thinking was that smaller and mid-sized banks were struggling under the weight of the tough regulations and that if they were freed from some of that burden, they could offer more loans to families and communities.

After the bank failures last month, plenty of those lawmakers who voted against the easing of regulations in 2018 took the opportunity to basically say, "I told you so," to their colleagues. Now a rollback of the rollback looks highly likely.

Vice Chair Barr, at the request of Fed Chair Jerome Powell, is heading up a comprehensive review by the Federal Reserve of what led to the bank collapses and the responses of regulators. That report should be ready by early May. It's likely that the Fed will propose tougher liquidity and capital standards, as well as enhanced stress testing, for mid-size banks soon after that report comes out. Depending on exactly what is proposed, the changes would have to go through the usual public comment process, which means new rules are unlikely to be finalized before 2024.

Second, a major focus of the two hearings was the deposit insurance system and whether it needs to be updated. Since the 2008 financial crisis, the cap on deposit insurance has been $250,000 per depositor. Martin Gruenberg, who chairs the FDIC, the agency responsible for insuring those deposits, stunned committee members when he testified that more than 88% of the deposits at Silicon Valley Bank were uninsured, meaning they were above that $250,000 cap, and that the 10 largest depositors at the bank held an incredible $13.3 billion in deposits.

One of the most controversial decisions in the days after the collapse of Silicon Valley Bank and Signature Bank was the FDIC's announcement that it would guarantee all deposits at the two failed banks. That will ultimately cost the FDIC about $23 billion. And it has sparked an intense conversation on Capitol Hill about whether the $250,000 cap for deposit insurance needs to be changed.

FDIC Chair Gruenberg testified that the agency is undertaking a review of the current deposit insurance regime and will report to Congress with policy options and recommendations by May 1. Already, however, there are bipartisan efforts underway to raise the cap amount. Some have floated a $500,000 cap, while others favor something like $2 million. Another possibility is having different caps for individual accounts and business accounts, since many of Silicon Valley Bank's clients were small and medium sized businesses that use those deposits for payroll.

Changes seem inevitable, given the bipartisan support in Congress. But the question is whether Congress can reach agreement on a specific plan before momentum wanes. This is a hot topic at the moment, but it'll inevitably be overtaken by another hot topic in the coming weeks. Once the banking turmoil fades from the headlines, will there still be interest in raising the deposit insurance limit? We'll see over the next few months.

Third, there is also bipartisan support for tougher punishments for executives when mismanagement results in a bank failure or emergency government intervention. President Biden called on Congress last week to pass legislation that would allow regulators to claw back bonuses and proceeds from stock sales by executives of failed banks. At Silicon Valley Bank, bank employees received their bonuses the same week as the bank failed, and executives were found to have sold company stock in the days leading up to the bank's collapse. Multiple bipartisan bills have already been introduced to ensure that bank executives don't profit off of this kind of situation. Of all the responses to the banking turmoil, this may be the one that is addressed the quickest.

And fourth, and perhaps most importantly, the banking crisis appears to be fading. From the president to the Treasury Secretary to the Fed governors, the message over the last few weeks has been consistent―that the failures of the two banks were unique to their particular circumstances, that broader contagion was unlikely and that the U.S. banking system as a whole remains strong and stable.

Next, let's turn to the debt ceiling. Back on February 1 President Biden and House Speaker Kevin McCarthy had their one and only face-to-face meeting, but there have been no follow-up discussions since. Even on Capitol Hill, it's been relatively quiet.

But that changed last week. McCarthy sent a letter to the president outlining a proposal that he hoped would jumpstart debt ceiling negotiations. He called for a debt ceiling increase to be part of a package of Republican priorities, including an unspecified array of spending cuts, reform to the permitting process for energy projects, tougher work requirements for recipients of some federal benefits and several other ideas. McCarthy has said that the House will consider a bill along these lines this spring, with the goal of passing it in order to put pressure on Democrats to come to the negotiating table. Of course, even if the Republican-controlled House were to pass such a measure, it would have no chance of moving forward in the Democrat-controlled Senate.

As expected, the president rejected the overture. The White House has not wavered in its insistence that it will only support a clean debt ceiling increase bill, without any strings attached. And so the standoff continues.

But there's a growing sense on Capitol Hill that this year's debt ceiling debate just feels different. That sentiment was captured in comments last week by House Financial Services Committee Chairman, Patrick McHenry, who told reporters that he's "never been more pessimistic about where we stand with the debt ceiling." 

"Frankly, I don't see how we get there," he said. "There's no process set up, there's no dialogue, there's no discussion."

The next big thing to watch for is likely to come towards the end of this month. Treasury Secretary Janet Yellen has indicated that she should be able to pinpoint the "default date" after April's tax receipts come in. In many ways, that's what everyone in Washington is really waiting for―an actual deadline. The current estimates range from late June to late August or even early September. Strong tax receipts this month could push the default date toward the later end of that span, while weaker tax receipts would likely accelerate the timing towards the early summer. But there's no question that putting a real deadline on when the debt ceiling has to be resolved without causing chaos to the financial system should spur more focused attention on the issue.

On my Deeper Dive this week, I want to take a closer look at what the bond market is telling us about the broader investing environment right now. Last year, as inflation and interest rates soared, bonds had, by some measures, their worst year ever. In early 2023, the mantra was "bonds are back." But in recent weeks, volatility has returned to the bond sector. And it feels like some of the "rules" that have held true in the bond market for decades have been turned on their head. So how should investors handle this environment? To give us some perspective on the bond market, I'm pleased to welcome Collin Martin, director and fixed income strategist here at the Schwab Center for Financial Research. Welcome to the podcast, Collin.

COLLIN MARTIN:  Hi, Mike. Thanks for having me.

MIKE: Well, Collin, as I said in my introduction, the bond market has been kind of wild recently, and "wild" is not typically a word we associate with bonds. For instance, early last month, the two-year yield briefly ticked above 5%, which is the highest it had been in more than 15 years. A couple of weeks later it was back below 4%. What's been driving this volatility?

COLLIN:  Well, a lot of it comes down to the Fed, Mike. As most listeners probably know, the Fed has been aggressively raising rates over the last year to fight the multi-decade-high levels of inflation we've seen. Now, the rate that the Fed uses to implement its monetary policy is the Federal Funds Rate, or the Fed Funds Rate, and it's the rate that banks charge each other on an overnight basis. But changes in the Fed Funds Rate can influence all types of rates, either directly or indirectly, and they can impact the borrowing costs for corporations or for consumers like you and me. Auto loans, adjustable-rate mortgages and home equity lines of credit are usually directly impacted by a rise or fall in the Fed Funds Rate, but other borrowing costs like a fixed rate mortgage, they tend to be indirectly influenced by the Fed Funds Rate.

So back to that volatility. In early March, Fed Chair Jerome Powell testified in front of Congress, and he stated that the peak Fed Funds Rate was likely to be higher than many initially expected. And when he suggested that, investors began to act, and they sent up treasury yields to really where they expected the Fed Funds Rate to get to down the road. Now, like most investments, yield comes down to supply and demand. And following the comments from Powell, treasury investors demanded higher yields then, in the here and now, so that they weren't stuck holding investments with lower yields if the Fed did hike more than they initially anticipated. So that pulled up short-term Treasury yields above 5%. Essentially, with expectations for a higher Fed Funds Rate, investors weren't willing to invest in a two-year treasury yielding, say, 4.8% if they were expecting the Fed to get to 5-1/2% or more.

MIKE: But, Collin, the dynamics changed pretty suddenly with the collapse of Silicon Valley Bank and the resulting turmoil in the banking sector. And that pulled yields down, right.

COLLIN:  That's right, they pulled them down sharply, really all because of the Silicon Valley Bank, and other banking issues, and just general concerns about financial stability. Now, the Fed has a dual mandate of price stability, which can be considered inflation, and maximum employment. But the Fed also has an unofficial mandate of financial stability, and the collapse and failure of a few banks led to concern that stability could deteriorate. So investors totally shifted their expectations for Fed policy, and instead of expecting a peak rate of 5-1/2% or more, expectations were that the peak rate might only be 5% or so. In fact, and a lot of investors weren't even sure if the Fed would hike at all going forward, and they began to price in rate cuts sooner than expected. Now, if the Fed was only expected to hold its rate at 5% or so, and then cut it soon, investors pulled down those expectations and were willing to accept a lower yield and lock in that lower yield for certainty rather than risk what happens if the Fed cuts rates down the road. And that's what pulled their prices up and yields down because of those expectations.

MIKE: Well, Collin, there's been a lot of talk over the past year or more about the inverted yield curve. The yield curve has become less inverted lately. Since recessions tend to follow an inverted yield curve, does the fact that it's less inverted now mean the likelihood of a recession is declining?

COLLIN:  We don't think so. We think the risk of recession is still elevated. The yield curve is inverted when long-term treasury yields fall below short-term treasury yields. So, today, for example, the 10-year treasury yield is about 3-1/2% %, but the two-year treasury yield is a bit higher, it's about 4%. And the yield curve tends to invert once the markets begin pricing in Fed rate cuts, which is what we were just talking about, and that tends to send long-term yields lower. Long-term yields like that 10-year treasury yield are often based on Fed Funds Rate expectations over the next 10 years or so. So if the Fed Funds Rate is 5% like it is today, but the Fed Funds Rate is expected to be lower in a year or two, you'll tend to see longer term yields decline to sort of average out what the Fed Funds Rate might be over the next number of years.

So back to your point, Mike, an inverted yield curve is usually followed by a recession. When the Fed hikes rates, it often slows growth along with inflation. It doesn't necessarily just bring inflation down. Now, some say that when the Fed hikes, things break. Maybe the economy slows, maybe corporate defaults pick up, but any way you slice it, there can be negative consequences from Fed rate hikes. So when things break, the Fed then tends to cut rates to stimulate the economy, which can un-invert the yield curve. For example, short-term Treasury bills or treasury notes could fall if and when the Fed cuts rates and they tend to fall below that level of long-term yields.

Now, we think that's what's led to the yield curve being less inverted now, it's really just due to expectations of sooner than expected rate cuts, so short-term rates have fallen more than long-term yields have declined. But if an inverted yield curve is usually followed by a recession, that doesn't mean that the fact that the yield curve is becoming less inverted is sending a positive signal about the economy.

Just the presence of rate cut expectations tells us that the likelihood of a recession is on the rise, mainly because the Fed cuts rates when they need to, when they need to stimulate the economy. And we think, unfortunately, the Fed will tighten enough right now, not just to slow inflation, but they'll likely weaken the labor market, which can lead to slower consumer spending, and then the risk of recession is still there.

So it's not a rosy outlook, Mike, and we think the risk of recession is still relatively high.

MIKE: Well, we're talking about the expectations for potential rate cuts, but of course a couple of weeks ago, the Federal Reserve raised interest rates by 25 basis points. At the same time, it's been engaged in Quantitative Tightening, which is a process whereby the Fed is slowly reducing its balance sheet, which had ballooned as a result of the fiscal and monetary stimulus during the pandemic. Raising rates and quantitative tightening―that's about taking liquidity out of the system. But with the banking crisis, the Fed had to launch an emergency program, the Bank Term Funding Program, to provide liquidity for the banks. Essentially, these efforts seem like they are in direct competition with each other. So how has the Fed been balancing the need to fight inflation, while also keeping in mind financial stability given the uncertainty in the banking sector?

COLLIN:  These programs can be considered in direct competition with each other, but what's important is that the Fed views them as different tools for different purposes. Quantitative tightening, where the Fed allows maturing bonds to actually roll off its balance sheet, is a form of tightening since it takes money out of the system. So if a treasury matures and the Fed doesn't reinvest those proceeds in a new treasury, it's taking that amount that it would have reinvested, takes that amount out of the system, and that just means there's less money available to, say, stimulate growth.

The Fed's Bank Term Funding Program is really just there to help make sure banks have the liquidity they need. The loans are short-term loans, they only have maturities of up to one year, and they're backed by collateral from each borrower. Now, yes, it has increased the amount of assets on the Fed's balance sheet, but we've already started to see the pace of borrowing slow a bit as banking concerns have begun to subside.

MIKE: The Fed is still hiking rates, as we've been talking about, most Treasury yields have declined over the last few weeks. Notably, the 10-yr yield is just 3-1/2% % at a time when the Fed funds rate is near 5%. So, what is the relationship between bond yields and the Fed funds rate?

COLLIN:  Well, Mike, we talked before about how the Fed Funds Rate can directly or indirectly impact other yields. Now, for the 10-year treasury yield, this is one where we see an indirect impact. The 10-year treasury yield is based on growth expectations and inflation expectations, but ‘expectations' are really the key word. Those expectations are what would likely drive the Fed Funds Rate in the future.

Now, think of it this way. If you're an investor, you can have a choice of rolling over one-month Treasury bills for the next 10 years, or you can buy and hold a 10-year treasury. Now, in this example, I'm using the one-month Treasury Bill since that tends to be directly influenced by the Fed Funds Rate. Now, let's assume that the one-month T-Bill offers a yield of 5%, but the 10-year treasury yield offers a yield of 3-1/2% like it does now. This tells us that the markets are expecting the Fed to cut rates at some point down the road. So if you invest in that 10-year yield today, while it offers that 3-1/2% % yield, it means you're locking in a 3-1/2% % yield annually for the next 10 years, and that's regardless of what the Fed does down the road. Whether it hikes rates, whether it cuts rates, you're locking in that rate for 10 years if you hold to maturity.

Now, if you invest in Treasury bills, you're really at the mercy of the Fed. If the Fed hikes rates, you tend to see Treasury Bill yields rise, and that's a good thing for investors―but if the Fed cuts rates, their yields should go down. So when you see the 10-year treasury yield below Treasury Bill yields, it's basically investors saying that they expect the Fed to cut and they don't want to be stuck earning lower yields down the road. So that yield of, let's say, 5% on a T-Bill right now might seem attractive. What happens if the Fed cuts down the road and then you're earning 2% or 3% yields or maybe even lower? So when you average those yields out, it's possible that the average yield over 10 years by rolling over those Treasury bills, is less than that 3-1/2% yield that a 10-year treasury offers.

So that's why that yield is lower today than what T-Bills provide. Investors are accepting that lower yield, since they expect the Fed to cut rates at some point down the road.

MIKE: Well, given that example and the fact that long-term yields are lower than short-term yields, what do you think investors should do? I mean, it can seem tempting to just stick with higher-yielding short-term bond because of that yield that it's offering right now?

COLLIN:  It does seem tempting, Mike, but we would resist the temptation to focus just on short-term bonds because of their higher yields. And this is probably the number one question we get these days, but our guidance is unchanged, and we continue to suggest investors consider some intermediate- or longer term-bonds.

For investors who are holding short-term bonds, we're worried about reinvestment risk, or the risk that once the Fed cuts rates, you'll be reinvesting maturing bonds at lower rates. Now, we know it's a tough pill to swallow, but we would rather accept a lower yield with certainty now rather than risk reinvesting at even lower yields down the road.

So whether you're considering money market funds or short-term CDs, Treasury bills, short-term treasury notes, they do look attractive on the surface, but if you have a long-term investing horizon, we'd rather consider investments with longer maturities that offer yields of 3-1/2% % or more. We don't want investors to buy a two-year note today at 4% only to be disappointed if the Fed cuts rates and in two years they're reinvesting those proceeds at a much lower yield.

MIKE: Well, what about corporate bonds. Investors seem to have their eyes on bonds from highly-rated companies. Lower-rated companies are finding the market pretty tough, right now. What does that portend for younger companies that need cash to grow or even just to survive?

COLLIN:  We do see this as a pretty big risk right now. For so long we were in this low interest rate environment. We saw it in the years following the global financial crisis, and then we saw it in the two years coming out of the pandemic, where borrowing costs were very low and obtaining credit was generally easy, and that's not generally the case right now. Since the banking failures in early March, the high-yield bond, new issue market has mostly been closed. So that means that corporations with low credit ratings haven't really been able to issue new debt or maybe they weren't willing to issue new debt given the market conditions.

And we talk about high-yield bonds, they're corporate bonds, but they have sub-investment-grade ratings. They're also called junk bonds. They have those low credit ratings for a reason. They tend to be smaller companies, they tend to have less diversified businesses, and they also have a lot of debt. And that's where the key risk comes from. If a company has a lot of debt, but then we start to see problems with their profits or problems with their cash flow, that poses a risk to the bond holders since there may be less money coming in than what needs to be paid out.

And a big risk is just the level of yields today and the sharp rise we've seen lately. If we go back to the middle of 2020 and 2021, even risky companies could issue new debt at borrowing costs of 5% or maybe even less. But now if they need to refinance existing debt or issue new debt, they're probably looking at borrowing costs of 8% or more. So that increase in interest expense is a really big hit to the bottom line, especially when we're expecting corporate revenues and profits to slow anyway.

So with the Fed still hiking rates and financial conditions tightening, we suggest investors focus on high-quality bond investments, those with investment-grade ratings. So we like Treasuries, certificates of deposits, investment-grade corporates, or investment-grade municipal bonds, and we're still cautious on the riskier parts of the market. Now, there may be an opportunity to take more risk if we see junk bond prices fall later this year, but for now we think it's a bit too early.

MIKE: Well, Collin, I want to shift gears a little bit and talk about one of the big issues coming out of Washington that I know investors are watching, and I certainly know the bond market is watching, and that's the debt ceiling fight. Given the bank turmoil, the debt ceiling debate has kind of taken a back seat lately, although it is slowly getting back into the headlines, but I think the debt ceiling is likely scaring a lot of investors. So what does it mean for the treasury market? Are there signals in the treasury market yet that worry is starting to grow about a potential default?

COLLIN:  We really aren't seeing signals of worry just yet, but we'll probably start to see concerns bubble up once we get into the summer months. So for now, we know that the Treasury can take extraordinary measures to avert a default, and the Treasury has suggested that those measures would probably be exhausted later this summer, but it's a moving target. So until we get more final, harder numbers, it's unlikely that we see the treasury market react too much.

Now, in previous debt ceiling debates, Treasury bills that were scheduled and expected to mature around the date when those extraordinary measures ran out saw the most volatility. We saw those yields rise relative to other Treasury bills. So, for example, if the Treasury's extraordinary measures were expected to run out on July 31, a Treasury Bill maturing on that day, and probably the days following, might fall―their price might fall, and their yields might rise because investors probably wouldn't be too interested in holding a Treasury Bill whose repayment may be delayed. So if history repeats itself, like what we saw in 2011, we would likely see the yields on those Treasury bills maturing around that ex-date when those extraordinary measures are expected to be exhausted, we'd probably see those yields rise. But Mike, we don't expect to see that until we get more details about when that date is.

MIKE: Yeah, we should get that guidance towards the end of this month after tax season is finished, because certainly Washington and I know the markets are really waiting for that ex-date to be announced. Until there's an actual deadline it always feels like Washington doesn't really have the energy or motivation to move forward on it.

But one other aspect of the debt ceiling debate that's getting a lot of attention here in Washington is the fact that these rising interest rates mean that the cost of servicing our debt is going up, and I expect this is going to be a big talking point in the coming debate. How concerned are you about the impact these higher rates could have on the U.S.'s ability to repay its debts?

COLLIN:  It is a concern, Mike, but likely not as big of a concern as many have made it out to be. When rates are rising like they are now, the Treasury's average interest expense doesn't automatically reset higher across the board. It's not like the Treasury has all floating rate debt and everything has to reset with higher Treasury Bill yields. It's really only when they have maturing securities that they need to refinance, that they would then be subject to the high current market rates.

Now, it is true that a lot of debt issued by the Treasury is short-term, but the average maturity of the Treasury's debt is roughly six years. And Treasury bills, those are the ones that need to be refinanced in a year or less, they represent less than 20% of the Treasury's marketable securities.

So in short, yeah, it does mean that the U.S. is likely seeing its annual interest expense increase, but, no, it doesn't really impact the ability of the U.S. to repay its debts. And keep in mind that once the Fed cuts rates, we'd likely see Treasury Bill yields decline, and, therefore, the U.S. borrowing cost decline, as well.

MIKE: Well, I expect we're going to see a lot of talk about this during the upcoming debate. And probably a lot of mischaracterization about it as politicians like to make this seem as scary as possible as this debate goes forward.

Well, as we continue to talk about the debt ceiling debate, how about other spillover effects to other parts of the bond market?

COLLIN:  There are a few areas we're watching Mike, and one is with long-term treasury yields. And, interestingly enough, long-term treasury yields could fall in this debt ceiling scenario because that's what happened back in 2011. If this debt ceiling debate continues and there actually is concern that the limit isn't raised, investors would likely head to the perceived safest investments out there, U.S. Treasuries. Now, that might seem counterintuitive, given that we're talking about a potential U.S. default, but we think that it would be a short-term default. It's really not about the government's ability to pay, it's about the willingness to pay.

So investors could take shelter in long-term Treasuries, which would pull their yields down and their prices up. And that's what we saw in 2011, where we saw the 10-year yield fall more than a full percentage point in less than two months. And we'd probably see risky investments, like high-yield bonds we just discussed decline in value. Just like investors would head towards safe investments, they would likely want to limit their exposure to risky investments. If the debt ceiling isn't lifted, there could be multiple second order effects if those maturing Treasury bills aren't repaid. That's billions of dollars that could be held in limbo and likely need to be paid out or need to go somewhere, but they would just be held in limbo. So just the thought of that could cause risky bond prices to decline.

MIKE: Yeah, we'll see what happens, but I do think politics on both sides of the aisle recognize the seriousness of a potential default and really don't want to push us over that cliff. So we've got a little bit of time to debate, but that's certainly going to be a big focus in Washington here in the coming weeks.

Well, we've talked a lot today about some of the unusual things going on in the bond market, and I always like to wrap up by discussing what investors should be doing. You've given us a couple of suggestions along the way. But with the yield curve inverting and then becoming less inverted and seeing treasury yields fluctuate sharply, I think a lot of investors are feeling pretty unnerved by the lack of stability in a part of the market that has seemed stable for years. They're asking themselves a lot of questions, like why invest for 10 years where there's a lot of interest rate risk when I can get close to 5% for very short-term investments. So what's the right strategy for the fixed income portion of my portfolio, right now?

COLLIN:  We have two main strategies that we're focusing on right now, Mike, and we think investors should first consider gradually extending duration, and, two, focus on high quality investments. Now, we talked about considering intermediate- and long-term investments already, but I think it's important to reiterate that idea. If you're an investor sitting in very short-term investments, potentially waiting for yields to rise again, we think that's an attempt to time the market, and we don't suggest that at Schwab. We'd rather take a long term approach, which means accepting lower yields now, but locking them in for a longer period of time and with certainty. So accepting a 3-1/2% yield on a 10-year treasury might not sound attractive when you get 5% with Treasury bills, but if the Fed cuts rates and you're reinvesting those Treasury bills at 2% or less, then you can see how that 3-1/2% on a 10-year looks pretty attractive.

And then, finally, focus on quality. Even with the recent decline in treasury yields, we're seeing yields for high quality investments still near their highest levels since 2007. So why take too much risk when you can get yields of 3-1/2% or more without taking too much risk.

We know a lot of investors have been waiting for higher yields to consider bonds, so, Mike, I think it's important to remind them that those higher yields are still here.

MIKE: Well, that is a great reminder, Collin, and a great way to wrap up this conversation. Thanks so much for taking the time to join me today.

COLLIN:  Thank you, Mike. Thanks for having me.

MIKE:  That's Collin Martin, Director and Fixed Income Strategist at the Schwab Center for Financial Research. You can read his commentary, including a recent article he wrote about Treasury Inflation-Protected Securities, or TIPS, at schwab.com/learn.

Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks. Take a moment now to follow the show in your listening app so you won't miss an episode. And if you like what you've heard, leave us a rating or a review—that really helps new listeners discover the show.

For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.

I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy and keep investing wisely.