Investment grade

Is now the time to lock in yields?

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Key takeaways
Manage reinvestment risk

Locking in a 5-year US Treasury yield has helped avoid the risk of reinvesting when short-term yields declined.

CDs or bond funds?

Even when CD rates were at a peak, history shows, in most cases, investors may have been better off in bond funds.

Bond choices

Two bond strategies that we believe may be options for cash-heavy investors: Investment grade and municipal bonds.

With short-term rates at elevated levels, investing in money markets seems like an easy decision for many income-seeking investors. But history shows us that, over time, “locking in” yields with a longer-term investment may be a better strategy.

For instance, in May 2000 and June 2006, short-term interest rates were as attractive as long-term rates. In both examples, investing in a 5-year US Treasury and locking in the yield avoided the risk of reinvesting at lower rates when short-term yields declined.

Consider these examples: $100,000 invested from May 2000 through May 2005 would have grown to $131,564 in a 5-year US Treasury but only $125,959 when invested in US 6-month Treasuries. That same amount invested from June 2006 through June 2011 would have grown to $125,380 in the 5-year US Treasury but only $117,951 in US 6-month Treasuries.1 (For a chart of this example, see page 9 of Beyond money markets: Maximizing cash.)

What about investing in bond funds?

With various ways to lock in yields, why might an investor choose a bond fund? Consider this: Some banks are offering one-year CD rates between 4% and 5%, which may look attractive to many investors. But history has shown that even when CD rates are at their peak, in most cases, investors may have been better off investing in bond funds.

The chart below shows the performance of a number of Morningstar fixed income fund groups during times when one-year CD rates were at their peak. At the end of these one-year periods, in most cases, bond funds came out on top versus CDs. Bold numbers in the table below signify times when bond funds outperformed one-year CDs.

Bond funds generally outperformed CDs even at peak CD rates

Historical 1-year CD returns vs Morningstar peer group returns

  1984 1989 1995 2000 2006 2019
CDs 11.24% 9.21% 5.69% 5.52% 3.79% 1.00%
Ultra-short bond 11.06% 9.49% 7.13% 7.56% 3.50% 1.13%
Short-term bond 19.49% 8.06% 10.72% 9.62% 4.13% 2.07%
Core bond 22.95% 9.26% 16.55% 11.90% 4.16% 8.72%
Core-plus bond 23.13% 9.07% 18.46% 12.60% 4.67% 6.71%
Corporate bond 24.38% 7.88% 20.53% 13.24% 4.29% 7.03%

Sources: Macrobond, Morningstar, CD rates are 1-year National Average Rates using month-end data. CD return dates of August 1984, April 1989, February 1995, June 2000, September 2006, and May 2019 represent the period high for one-year CD rates. Morningstar Direct peer universe information was run on 2/8/2023. Morningstar US Fund Ultrashort Bond peer group; Morningstar US Fund Short-Term Bond peer group; US Fund Intermediate Core Bond peer group; US Fund Intermediate Core-Plus Bond peer group; and Morningstar US Fund Corporate Bond peer group. See disclosures for peer group definitions. Past performance does not guarantee future results.

Two strategies to consider

Let’s take a closer look at two types of bond strategies that we believe may be good options for cash-heavy investors: investment grade bonds and municipal bonds. Over rolling 10-year periods, both investment grade corporate bonds and municipal bonds have outperformed T-bills 100% of the time since 2012. (See charts below.)

US corporate and muni bonds outperformed T-bills

Source: Macrobond. Historical analysis reviews Bloomberg US Corporate Index (5) and Bloomberg US Treasury Bills Index (6) annualized rolling return data dating back to 2012. The calculation measures how often Corporate Bonds on a rolling 12-month basis have provided a higher return than T-bills measured in that same rolling 12-month period. An investment cannot be made in an index. Past performance is not a guarantee of future results.

With yields at current levels, short and intermediate-term bonds have attractive breakeven characteristics. (See chart below.) Consider this example of a 5-year bond currently yielding 2% and a 10-year bond yielding 3%. In five years, you'd have to be able to buy a 5-year bond yielding 4.01% in order to do as well as you would have if you’d bought the 10-year bond at 3% now. Forward rates are showing us that 5-year bond rates will likely be lower in five years, which makes extending duration more attractive. Currently, the forward rate for the 5-year Treasury five years from now is 3.72%.2

Rate drops: Longer duration outperformed, reinvestment risk for cash

Breakeven analysis total return as of Aug. 18, 2023

    Parallel shift Current yield-to-worst Parallel shift
Bloomberg indexes Duration -150 -100 -50 50 100 150
1-3-year Corporate Index 1.79 8.50% 7.61% 6.71% 5.82% 4.92% 4.02% 3.13%
3-5-year Corporate Index 3.50 10.93% 9.18% 7.43% 5.68% 3.93% 2.17% 0.42%
5-7-year Corporate Index  5.21 13.45% 10.84% 8.24% 5.64% 3.03% 0.43% -2.17%
Aggregate Bond Index 6.17 14.37% 11.28% 8.20% 5.12% 2.03% -1.05% -4.14%
US Treasury Index 5.91 13.49% 10.53% 7.57% 4.62% 1.66% -1.30% -4.26%


  • 1

    Source: Bloomberg L.P, 12/31/22. For illustrative purposes only. Past performance does not guarantee future results.

  • 2

    Bloomberg L.P., USD Overnight Index Swaps (OIS) forward swap 5-year bond in five years, 8/18/2023.