When yields started to rise in August 2020, virtually all Treasury bonds offered a yield of 1% or less; yields have more than tripled since then, offering significant opportunities for investors.
The 2-year / 10-year Treasury yield curve inverted in April, and the first estimate of Q1 US GDP showed negative real economic growth.
By building a Liquidity strategy—and funding it with cash, bonds, and borrowing capacity to meet the next 3-5 years of your portfolio’s cash flow needs—you can build a buffer between temporarily losses in your risk assets and the resources that you need to maintain your lifestyle.
If inflation is higher than these breakeven rates, TIPS will provide a higher return than nominal Treasuries because their bond values will increase with CPI, but there is a cost to this direct insulation against inflation: inflation fears have driven TIPS yields into negative territory.
In your Liquidity strategy, owning a commodity-linked structured investment with a 2-3 year maturity and full downside protection may help you to protect a portion of your spending against the risk of inflation.
In addition, higher bond yields will help to cushion investor returns from here and will help to bolster bonds’ diversification benefits if stock market volatility continues.
By matching your spending with specific bond maturities, you help to immunize yourself against further bond market losses; after all, the bonds are structured to mature at par in coordination with the timing of your spending needs.
This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.
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