The Yield Curve

The Yield Curve

What is the yield curve?

The sweet spot for long-term bonds

Where to invest if you like to gamble

Should you pay for a hot manager who gambles on interest rates?

What is the yield curve?

Plot of yields versus maturity dates

Generally ranges from 90 days to 30 years

The sweet spot for long-term bonds

Generally, the yield curve is upward sloping

Long-term bonds yield more than short-term bonds

The yield curve generally slopes up until maturities of about 10 years

After 10 years, there's generally very little additional yield even though the interest rate risk is higher

Because of this, you probably don't need to invest in bonds with maturities longer than 10 years

Where to invest if you like to gamble

But if you like to gamble on the direction of interest rates, invest in 30 year bonds

Even better, invest in very long-term zero coupon bonds which have the highest duration

Should you pay for a hot manager who gambles on interest rates?

Some mutual funds try to forecast changes in interest rates

If they think interest rates are going up, they invest in short-term bonds

If they think interest rates are going down, they buy long-term bonds

Most of the time, this is a sucker's bet

Studies indicate the track record of those who try to bet on interest rates is very poor

Best advice

Just relax and stay with a bond portfolio that's laddered or otherwise diversified over time