Today’s Yields Put the Income Back in Fixed Income

MIKE TOWNSEND: For the past 15 years or so, bonds have remained an important part of any portfolio, providing stability, diversification, perceived safety, and a predictable return, even if that return wasn't much. But they certainly weren't exciting.

Between 2008 and 2023, Treasury bonds earned an average annual return of less than 2.5%, and 2022 in particular was the worst performing year for bonds ever. Of course, the main reason for that is because the fed funds rate itself never went above 2.5% from 2008 to 2022—and for a lot of that period was near zero.

Now that has all changed. The Wall Street Journal recently reported that bond investors earned nearly $900 billion in interest last year from Treasury bonds alone. That's twice the average over the previous 10 years. The reason―after all those years of near-zero interest rates, the fed funds rate stands north of 5%, meaning that Treasuries of almost any duration have yields of 4% or more.

Some analysts are saying that bonds are more attractive right now than stocks. They've put the "income" back in "fixed income."

So where are the opportunities right now for fixed income investors? And is it time for investors to rethink the value add that bonds offer for a portfolio?

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 just a few minutes, I'm going to explore what's going on in the bond market with Collin Martin, director and fixed income strategist at the Schwab Center for Financial Research. We'll talk Treasuries, corporate bonds, high-yield bonds, the Fed outlook, and much more.

But first, here are three things to know about what's going on in Washington right now.

At the top of my list, we got some interesting news about the health of the Social Security and Medicare programs last week. Each year, the trustees of the two programs issue a report providing a ton of detail about the state of each program's finances. The headline is always the trustees' estimates of how long the programs can continue to pay out full benefits if current policies remain in place.

In last week's report, the Social Security trustees said that the program would be unable to pay full benefits beginning in 2035―that's actually one year better than last year's estimate.

And the Medicare trustees had even better news―they projected that the program would be able to pay full hospital benefits until 2036, a full five years better than they had projected just a year ago.

The key to the improvements was a strong economy in 2023, and especially low unemployment. Both programs are dependent on payroll taxes―more people working means more payroll taxes going into the system. 

Of course, neither program is on a sustainable path over the long term, and the trustees reiterated that policymakers in Washington can't wait too much longer to make the tough decisions to shore up the programs. 

I don't expect that to happen anytime soon, but I do expect this to be a big topic on the campaign trail. Both sides will engage in a lot of hyperventilating over which party is more serious about protecting Social Security and Medicare. Democrats will argue that Republicans want to cut benefits and raise the retirement age. Republicans will argue that Democrats want to raise taxes. Of course, ultimately, these are exactly the types of difficult choices that must be in made in order to stabilize the programs into the future. But none of them are things that anyone wants to talk about in an election year.

Earlier this year, my colleague Susan Hirshman joined me for a great discussion on Medicare, and you can find that on schwab.com/WashingtonWise. Susan is going to join me later this summer for a deep dive on Social Security, so stay tuned for that.

Next up, the Congressional Budget Office came out last week with an estimate that simply extending all of the 2017 tax cuts before they are set to expire at the end of 2025 would cost the federal government about $4.6 trillion over the next 10 years.

You've probably heard me talk about how both parties are already laying the groundwork for next year's tax fight, when key provisions like the lower individual income tax rates, the higher standard deduction, and the higher amount of assets that can be passed down without triggering the estate tax are among the 2017 tax items that are set to expire. As the tax debate moves into high gear, a key element will be how much it will cost the federal government in terms of lost revenue to extend various provisions. 

While $4.6 trillion is a huge number, the tax decision won't be all-or-nothing. In other words, no matter what the configuration is in Congress in 2025, it's very unlikely that all of the 2017 tax cuts will be extended, and it's very unlikely that they will all just expire. That $4.6 trillion is the estimated cost if every single item from that 2017 tax bill―and there are more than 100 different provisions―is extended exactly as it is now. The reality is that the most likely outcome is that some of them are extended, some of them expire, and some other tax provisions that we don't even know of right now will be added to the package. 

That said, the number does put some perspective on how both parties are going to have to find places to offset some of that cost, likely by raising taxes elsewhere. At an event late last week, President Biden's top economic adviser discussed the White House's plans to raise taxes on individuals earning more than $400,000 a year, which is expected to be a centerpiece of the president's re-election campaign. Former President Trump, who signed the 2017 tax bill into law, has said he wants to see those cuts extended, but he's not yet released his own detailed plan for taxes.

And the third thing to know is not the world's most important policy issue, but I thought this was interesting nonetheless. Last week, the Commodity Futures Trading Commission, better known as the CFTC, proposed a rule that would ban what are known as "event contracts," which are essentially mechanisms to bet on the outcome of events, like elections. 

This is a tiny part of the market―most investors are probably not even aware there is such a thing―but it's been growing quite rapidly in the last few years. Various companies have opened up futures markets where individuals can weigh in on who will be elected president, or which party will win control of the House or Senate, or how many times the Fed will cut rates this year. You can also try to pick things like the winner of the Best Actor Oscar at the Academy Awards or certain sports outcomes. One company is offering a market on whether TikTok will be banned or not. 

The five-member CFTC split on the vote, with the commission's three Democrat members voting to propose the rule and the two Republicans opposing it. Democrats argued that the presence of these markets in political races could threaten election integrity. Republicans thought the proposal was too broad and questioned whether the issue was even within the agency's authority. The proposed rule attempts to clarify a blurry line between legal betting, which is regulated by the states, and creating a futures markets based on event outcomes. Overseas markets that allow betting on things like the outcome of the presidential election would not be impacted by the rule.

The CFTC has previously blocked certain event contracts and in late 2022 moved to shut down PredictIt, a popular New Zealand-based election betting site. PredictIt eventually received a court-ordered stay while the case continues. 

One of the interesting aspects of these markets is that they offer journalists and political analysts like me another window into which way the wind may be blowing in a political race, different than the usual polls of likely voters. The market for the outcome of the presidential race, for example, changes in real time, kind of like a stock price during the trading day. A news event or campaign trail development might move the "price" on a victory by one candidate up or down. It's not scientific, of course, but it is an interesting lens on the changing dynamics of the race.

The proposal now enters a public comment period, and it will likely be months before a final version is voted on by the commission. In the meantime, the markets can continue, and the proposal is unlikely to be finalized in time to affect this year's election. 

On my deeper dive, I want to take a closer look at the bond market, which is pretty hot right now, and that's right, "bonds" and "hot" in the same sentence. For the first time in two decades, some analysts think bonds are more attractive than stocks. So to help us sort through what's going on with bonds right now, I'm pleased to welcome back to the podcast Collin Martin, director and fixed income strategist at the Schwab Center for Financial Research. Thanks for joining me today, Collin. 

COLLIN MARTIN: Thanks for having me, Mike. Happy to be back. 

MIKE: Well, Collin, we titled this podcast "Today's Yields Put the Income Back in Fixed Income," and that's something you and your team have been talking about for probably the last 18 months or so. But it seems like the idea has just really started to take hold, and we're seeing individual investors, not just you bond gurus, getting excited about bonds. So what do you think is driving this? 

COLLIN: Well, first, thank you for referring to us as bond gurus. That's great. But I think what's driving this is really the high yields and high income payments that bonds offer. We know a lot of investors have been waiting for yields to rise to levels such as this, and here we are. 

And when we think about income and fixed income, it's important to take a step back and explain what we're talking about here. Fixed income is another term for bonds. And when you buy a bond, say, from the U.S. Treasury, you're lending to the U.S. government. You're lending to an issuer with a promise of repayment at maturity, barring default, of course, and then a promise of regular income payments. And those income payments and those yields that these bonds offer have risen sharply. And I think this is really important for investors who are in retirement or near retirement and are looking to live off of a fixed income. I think that's really important. 

So for reference, the main index that we look at to look at the bond market, it's called the Bloomberg U.S. Aggregate Bond Index. It's kind of the benchmark U.S. high-quality index out there. It holds U.S. Treasuries, investment-grade corporate bonds, and agency mortgage-backed securities. Its average yield is around 5% right now, a little more than 5%. But if we go back to the 10 years following the financial crisis, so from 2010 through 2019, that 10-year average was just 2.5%. So we're looking at an average yield that's roughly double what it was for that 10-year timeframe. I think that's really important, again, for investors who are in or nearing retirement and looking for higher income today.

MIKE: We can't have a bond discussion without talking about the big driver of the bond market, and that's the Fed. Earlier this month, Fed officials left interest rates steady. That's six straight meetings they've done so now. With inflation proving to be a bit stickier than expected, the Fed says that it still wants to see it convincingly move down towards 2% before beginning rate cuts. Market expectations, which started the year thinking maybe six or seven rate cuts in 2024, now are down in the one or two cuts range. So considering all the indicators you watch, what's your thinking on what the Fed will do over the rest of the year, and what the implications are for the bond market? 

COLLIN: We do think the Fed will cut rates this year, and our expectations are generally aligned with market expectations. We're expecting one or two cuts. That is a change from where we were coming into this year. Our outlook for 2024 initially was for about three rate cuts, but we've pulled that back a little bit, mainly because of inflation proving to be a little bit stickier than expected, as you mentioned, Mike. But how we've been framing it is that inflation appears to be sticky, but we don't think it's stuck. We do think it should resume its downward trend. We think that disinflationary trend should resume. We have a number of things we're looking at, signals we're looking at, specifically with the labor market. And I think as the labor market loosens a little bit, you can see consumer spending slow. And that can pull inflation lower because consumer spending is such a big driver of the economy, and if you have a lot of consumer spending that can kind of spark inflation. 

When we talk about the labor market loosening, we're not expecting a big decline in the number of those employed. We're not expecting a surge in the unemployment rate, but we are expecting a slower pace of job growth, kind of cooling off a little bit. We're still expecting wage gains, but we're expecting them to come down a little bit. So we're not expecting wage declines. We're not expecting wage losses. We're just expecting that labor market to come a little bit more in balance. And that in and of itself can bring, and should bring, inflation down. 

But until it becomes clear that a Fed rate cut is coming soon, we think most Treasury yields should stay in their current range. So if we look at short-term investments, like Treasury bills or other investments that are related to Treasury bills, like short-term CD rates or money-market-fund yields, we'd expect them to stay where they are right now. When you think about intermediate-term bond yields, or Treasury yields, that tends to be in the four- to 10-year maturity range, or long-term bond yields, that's usually 10 years or more, they'll probably stay kind of where they are. But we think once those rate cuts become more likely, if we start to see them on the horizon, we'll probably start to see those yields fall, intermediate- and long-term yields fall a little bit, because the bond market tends to be forward-looking. 

But the good news is that yields have risen sharply this year. If we look at something like the 10-year Treasury yield, for example, last year it hit a peak of 5% in the fall, and then by the end of last year and then into early January of this year, it actually fell below 4%, but then it's rebounded to the 4.5% area. We think that's good. So for investors who have been waiting to consider bonds and have kind of been on the sidelines a little bit, there's still an opportunity there. You've been given another opportunity to earn some higher yields than what you would have gotten three or four months ago. 

MIKE: Well, I mentioned earlier that some analysts have been saying that bonds are more attractive right now than stocks, and it certainly has been a while since that was the case. So what are some of the key things that investors should be considering as they seek to strike a balance between equities and bonds in a portfolio? 

COLLIN: We think it's all about balance. We don't think it's an either/or decision. It should be a both/and. So when we talk about bonds, we're not suggesting anyone sell everything else and go buy bonds. They should always work in tandem, and make sure you have an allocation of both that are going to help you meet your goals.

But one thing that we can look at from a valuation standpoint are yields, or the income you can earn from either investment because a lot of stocks do pay dividends. But when you look at stock dividend yields on average, they tend to be a good bit lower than what high-quality bond yields offer today. So I think that's really important for income-oriented investors right now. If you're looking for income, bond yields, high-quality bond yields, do offer a pretty nice yield advantage over dividend yields. 

It's not just about income, though. It's about diversification and building your portfolio. And one way we've been framing it, Mike, is that the high bond yields today can help you de-risk your portfolio. And I think it's good to think of it from a financial-planning standpoint. If you're in or nearing retirement, I like to use that example a lot. But when you're coming up with a plan, there's usually some sort of expectation about annual total return that's going to help you meet your goals. And when we look at yields in the 4, 4.5, 5%-plus, depending on which types of bonds, that means that you can maybe own fewer stocks and still reach your goals. Because if we go back to, say, pre-pandemic in the early years following the financial crisis when yields were in the 1, 2, 3% area, it's really tough to deliver, say, a 5, 6, 7% average total return if bonds are offering such low yields. But bond yields are up now, and that means they can help you meet your goals without taking as much risk in other parts of the market. 

MIKE: Well, there's an important point there that you made about dividends and bond yields. Dividends, of course, are not guaranteed. So for income-oriented investors, I think bonds really stand out as a source of reliable income. 

Let's shift gears a little bit. Keeping rates higher for longer, obviously good for investors, but can be bad for borrowers. So let's pivot to the corporate bond markets since corporations have a lot of debt outstanding. I know in your role on the fixed income strategy team, you specialize in corporate bond markets. So what should investors be thinking about when they look at corporate bonds today? I mean, yields are relatively high, but the risk seems high given the rise in borrowing costs. So are there opportunities in corporate bonds right now? 

COLLIN: We do see opportunities, but we see them more in the investment-grade corporate bond market, because when you think about the corporate bond market, it's really divided into two different markets based on credit rating. We like those with investment-grade credit ratings. So those are credit ratings of AAA down to BBB. Now we're a bit more cautious on high-yield bonds, or sub-investment-grade bonds. Those have credit ratings below BBB. 

If we look at investment-grade corporate bonds, we're not as concerned about the rise in borrowing costs over the past few years. And a lot of that has to do with some of the refinancing activity we saw in 2020 and 2021. Let me bring it back to kind of homeowners and mortgage rates. Back in 2020 and 2021, a lot of homeowners refinanced their mortgages. We've since seen mortgage rates rise pretty sharply, but if you hold a low-rate mortgage, you're really not as impacted by that rise in borrowing costs. And I think we see that for a lot of investment-grade rated issuers. A lot of those issuers are able to issue more long-term debt. They're able to successfully issue a 10-year bond, maybe even a 30-year bond. And we saw a lot of that happen in 2020 and 2021 when we saw very, very low, historically low, borrowing costs. So the recent rise in borrowing costs, while a negative, it's only a negative for those issuers if they happen to have a bond maturing, and you tend to see longer maturities with investment-grade issuers. 

Fundamentally speaking, we think investment-grade issuers are in pretty good shape. We're seeing corporate profits rise. We're seeing corporate revenues rise, we're seeing cash flows rise, and they have those investment-grade ratings for a reason. They generally have more stable cash flows, more diversified businesses. We're pretty comfortable with the fundamentals there. 

It's really the yields that we think are very attractive. The average yield of the Bloomberg U.S. Corporate Bond Index is around 5.5%. And again, you have to go back to, you know, the pre-financial crisis days to see yields this high. So I know a lot of investors have been waiting for yields like this. We think they're here. 

One final point on investment-grade corporate bonds. We think they can be a good way for investors who have maybe been a bit hesitant to move out of their short-term bond holdings because of the high yields they offer. If you look at Treasury bills or money-market-fund yields, things like that, you're looking at yields of 5% or more, on average. But if you look at investment-grade corporates with intermediate-term maturity, say, five to 10 years or so, you can get yields in the 5.5% or more area. So that allows you to kind of lock in that rate and not be as sensitive to changes in Fed policy. Because if you're in very short-term investments right now, once the Fed cuts rates, it's highly likely that those short-term yields would fall. So if you kind of move out and consider some intermediate-term maturities, maybe that four- or five- to 10-year area, you can lock in those yields, and you don't really need to sacrifice much yield, if any yield. because those yields are kind of in line with what you can get with those short-term alternatives. 

MIKE: Great points there on investment-grade corporate bonds, but you mentioned that you're a bit more cautious on high-yield bonds, or junk bonds. So what about those down the credit-rating spectrum? They might be more threatened by higher borrowing costs, as those costs can really eat into their bottom line. So are we seeing more of them fail, or are they finding ways to borrow even at these higher rates, and what does that mean for those zombie companies out there? 

COLLIN: You hit all the key points right there, Mike. We are cautious in high-yield bonds because they do have a lot of debt. They have more debt relative to earnings than investment-grade issuers tend to have. So that rise in borrowing costs can hurt them a lot more just given that high debt load. They also tend to have shorter maturities. I mentioned that a lot of investment-grade issuers were able to issue kind of longer-term debts. They don't need to worry about short-term refinancing as much as high-yield issuers. They tend to have shorter maturities. So for in this higher-for-longer Fed policy, higher-for-longer interest rate environment, that means that some of these high-yield issuers or maybe a lot of these high-yield issuers can't necessarily hold off in refinancing. At some point, they're going to start seeing more and more debt come due, and they'll have to refinance it at these high rates. So we think that's a risk. And because of all that, we have seen defaults pick up. You mentioned, have we seen some of these fail? Yes, we have. The default rate continues to rise, and so that's a key risk. 

And your point about zombies, I always love talking about zombies, mainly because the name is pretty funny. It always … you know, I see some ears perk up a little bit when I mention that. A zombie company, there's probably a few definitions out there, but the best way to describe them are companies that really aren't making enough money to even pay the interest payments they owe on their debt. And a lot of them were able to survive, say, in the post-financial-crisis period because of the zero interest rate policy by the Fed. With rates so low, they were able to kind of just roll over their debt at low rates. I mean, of course, there were failures here and there. It's not like all zombies were doing great, but that low-rate environment allowed a lot of them to continue. That's a risk now, and the high-rate environment, it means that they'll likely struggle going forward. 

But the main reason why we're cautious on high-yield bonds is just the yields they offer. On the surface, the yields might look attractive. You can get, on average, yields of 7 to 8% with high-yield bonds, but that yield advantage relative to Treasuries is relatively low. And so the yield advantage that high-yield bonds offer over a comparable Treasury, it's just around three percentage points on average. So a lot of that high-yield that you see really is coming from the level of Treasury yields and not risk premium. So you're not really being compensated too well to take on that added risk of lending to these risky companies. 

MIKE: Great explanation there, Collin, on these zombie companies, one of my longtime favorite financial terms. It's just such a vivid descriptor of how these companies are kind of stuck in the middle, kind of meandering along, and not able to either succeed or fail sometimes. It's just a perfect term. 

Well, all this is great if you're buying bonds. What if you need to sell a bond that you're currently holding? Since the beginning of 2024, exchange-traded funds holding longer-term Treasury bonds are down in the neighborhood of like 10%. So what do you do in that situation? 

COLLIN: Well, in that situation, Mike, I wouldn't want to own a really long-term bond. And I want to build on that a little bit. So we hear that a lot, and to be honest, it kind of bugs me because I think it's a way for people to sensationalize an issue that maybe doesn't need to be sensationalized. If we take a step back and look at kind of the fundamental relationship with bonds is that their prices and yields have an inverse relationship. And so when yields rise, their prices fall. And I think a lot of investors, a lot of listeners, might know that from 2022. Yields rose really high, and we saw a really bad performance, large price declines with a lot of bond investments. 

But the prices of all bonds don't move or fall by the same amount. A key driver of a given price decline is a bond's maturity, and, you know, all else equal, the longer the maturity, the more sensitive that bond will be to changes in interest rates. So when you hear about a long-term bond index or fund suffering a really large decline, I would just say, "Well, don't own a long-term bond or bond fund." If you don't have a 30-year investing horizon, maybe it doesn't make sense for you to own a 30-year bond. And to put it into even more perspective, so the U.S. Aggregate Index, which we talked about earlier, the benchmark index for investment-grade-rated bonds here in the U.S., it's down less than 2% so far through the middle of May. So not all bonds are down that much. And even if you look at short-term Treasuries, like Treasuries with one- to three-year average maturities or so, their total returns are up. So not everything is down so much. And if you hear about a long-term bond investment being down a lot, that's not indicative of the whole market. 

But to your point about what happens if you need to sell, well, the beautiful thing about bonds is that they mature. They have maturity dates. So whenever you're considering a bond investment, whether it's individual bonds, or a fund, or whatever the strategy is, look at what the average maturity of those holdings is to make sure it matches with your investing horizon. But if you have a two-year investing horizon, I don't think it makes much sense to be in a strategy that has 10-year bonds because you don't know what the price will be. Because at the end of the day, the price is unknown if you need to sell in the secondary market before maturity. So that's why bonds can be great planning tools, and it's something to be cognizant if you do own bonds. We know it caught a lot of investors off guard in 2022, that inverse price-yield relationship. So if yields were to rise from here, even though it's not our outlook, it could pull prices down a little bit going forward. 

MIKE: Really what you're talking about here is the yield curve, or maybe more specifically, the inverted yield curve. And it feels like that's something that the media really focuses on, is always kind of telling us about it, and I think causing people to worry about it. So is this something for investors to be concerned about, or is there an opportunity here? 

COLLIN: We don't think it's something that investors need to be concerned about right now. And I'll go over what the yield curve is and what it isn't. The yield curve, like you alluded to, Mike, you hear about it a lot in the financial media, it's really just a line that shows the yields of various Treasuries by their maturity date. So picture a line that goes from left to right. On the left side of the line is very short-term Treasuries. On the right side of the line is longer-term Treasuries, intermediate terms in the middle.

And when you connect the dots, that's the yield curve. The issue right now is that the yield curve is inverted. And that's when long-term rates are lower than short-term rates. It's a concern when you hear about it in the media because, generally speaking, when the yield curve inverts, recessions tend to follow. But what the yield curve is not is a guarantee that a recession is coming. It's not a predictor. It's really just a symptom of the economic environment and Fed policy at a given time. But what it really is, it's the market expecting rate cuts at some point. And when you have an inverted yield curve, it's investors, the markets, I'm using that loosely, but investors are willing to accept a lower yield with, say, a 10-year Treasury note than what they can get in a Treasury bill because over that 10-year timeframe, they expect that total return to actually be similar with rolling over three month T-bills. We're given an option when we can buy Treasuries. Invest in short-term Treasuries and roll them over and kind of be at the mercy of what the Fed does or doesn't do. Or you can decide to move longer on the yield curve or consider some longer-term bonds and lock in those yields. The inverted yield curve doesn't necessarily mean a recession's coming. It suggests that maybe growth will slow because the Federal Reserve has hiked enough that it is restrictive and economic growth can slow and inflation can slow, but it doesn't necessarily mean that a recession is around the corner. 

MIKE: Great explanation there, particularly on the recession question. I know you get that at your events all the time, and I certainly hear that question all the time as well. 

So I want to switch gears a little bit. On the last episode, our colleague Jeff Kleintop joined me to discuss the global markets, and we talked about how central banks around the world are starting to … I guess the word is "decouple" from the Fed and really think about cutting rates before the Fed begins to do so. If the Fed is going to hold rates higher, it means that the cost has gone up to service our mountain of U.S. debt. And a common concern I hear from investors when I'm speaking around the country revolves around whether foreign investors will continue buying U.S. debt. The thinking is sort of like this―if the Treasury is issuing more debt, who is buying it up? If other markets are offering less yield, then does that make the U.S. look better to foreign investors, ensuring our debt gets bought up? So this is a question I get all the time. I'm really interested in your thoughts on this. 

COLLIN: Lots to unpack here, Mike. Bear with me because there's a lot of great points. I get these questions all the time. 

So let's start first with our debt and who buys it. So the Federal Reserve actually tracks who owns U.S. Treasuries, so who owns the U.S. debt. And it can be foreigners, households, money market funds, banks, insurance companies. There's a number of categories of investors that hold our debt. Now, foreigners are the largest holder in absolute terms. As a share of debt, in relative terms, their holdings have actually declined over the years. So in other words, their holdings haven't kept pace with the rise in our debt that you alluded to. Our debt has risen by a lot over the past number of years, and foreign government holdings haven't necessarily kept pace. 

And I think this is the risk that a lot of people are concerned with. If there's so much debt out there—like we've seen since March of 2020, I think is a good start—who is going to buy it all, and is there a risk that there aren't enough buyers out there? We don't really see that as a risk right now. We think there are plenty of buyers, and we've seen that with Treasury auctions. So the Treasury holds regular auctions for its Treasury bills, for its Treasury notes, for its Treasury bonds, and really at every auction there's always more potential buyers than bonds that are being auctioned. So I think that's a good thing. The risk isn't necessarily of a failed auction, Mike. It's not like the Treasury wants to auction 40 billion one week, and there just isn't $40 billion of potential buyers. The risk is more that maybe there are marginal buyers who are interested in participating in the auction, but they just want a higher yield. 

I think we saw a little bit of that last year. You know, there were a lot of concerns about the deficit and the debt last fall, and I think that was part of the reason why we saw the 10-year Treasury yield rise to the 5% area. But it's since declined, mainly due to expectations on Fed policy. So that shows us that that's not a key driver, that foreign potential demand. We don't think it's a key driver out there, and generally speaking, we think there's plenty of buyers out there, and we're not really too concerned that they will suddenly start demanding higher yields because that just hasn't really been the case throughout history. 

One quick point, Mike, on foreigners holding our debt. When we hear about that, so when we hear about, say, China for example, that's a common question I get, they and other countries hold our debt, hold our Treasuries the way you and I would. They just hold Treasury securities. It's not like we have side deals with other countries. It's not like we negotiated a specific loan with China where we now owe them money. These foreign governments just bought our Treasuries the way any other individual investor could, but a lot more than I would probably own. 

And then to the last point about other foreign investors, and what they're thinking about when it comes to our yields, when other central banks might be cutting, if anything, that makes our debt even more attractive. If we look at U.S. Treasury yields versus other developed-market economies, say, countries in Europe or Japan, U.S. Treasuries offer a relatively high yield advantage there. So if you're a foreign investor, it's more attractive to hold Treasuries. And then the idea that the U.S. dollar is still, you know, the world's reserve currency, it's still one of the most liquid, most traded currencies out there, when you add that all together, we think that, you know, foreigners will still be interested in holding our debt even though the amount of debt has risen substantially lately. 

MIKE: Well, I am definitely stealing that answer for when I get that question on the road. I get it almost everywhere I speak. So really appreciate your thoughts on that. 

This has been a great conversation, as always, Collin. I want to wrap up with your big takeaways. What are your suggestions for fixed income investors as we look out over the rest of 2024? 

COLLIN: Well, first, I think still consider adding bonds to your portfolio, especially if you haven't yet. You haven't missed the opportunity. We're seeing yields, especially high-quality yields, that we think are still attractive given the grand scheme of things, and especially where they are relative to the past 15 years or so. We know a lot of investors have been waiting for 4, 4.5, 5% yields without taking too much risk, and we think that's the case right now. 

Two, on the risk front, we just don't think it makes sense to take too much risk because you don't need to. So if I go back to that high-yield example we talked about, if you're only earning, say, three percentage points more than an average Treasury, we'd rather just focus on that Treasury. We don't think it makes sense to take too much risk if you're not being compensated for it. 

And then finally, from a financial-planning standpoint, always consider your investing horizon and the maturities of bonds you're considering. Whether it's individual bonds, a bond fund, whatever the strategy is, that's the beautiful thing about bonds, they have those maturity dates. So they can really help with the planning process, and they can help you meet your goals and objectives, not just because of those maturity dates, but because of the high yields they offer, and how they, you know, might let you de-risk in other areas. 

MIKE: Well, thanks, Collin. Really appreciate your time joining me today. 

COLLIN: Thanks for having me, Mike. Always happy to join.

MIKE: That's Collin Martin, director and fixed income strategist at the Schwab Center for Financial Research. You can find Collin's viewpoints at schwab.com/learn.

That's all for this week's episode of WashingtonWise. We've got a little change to our schedule coming up because of the Memorial Day holiday. So there won't be an episode that week. We'll be back with our next episode on June 13. Take a moment now to follow the show in your listening app so you get an alert when that episode drops and you don't miss any future episodes. And I'd be grateful if you would leave us a rating or a review—those really help 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.