Experts Share their Tips on How Investors Can Profit from the Skyrocketing Yields

Once again, yields are on the rise.

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There was a five-week high in the yield on the 10-year U.S. Treasury bond on Monday, while the yield on the 2-year U.S. Treasury bond had reached 4.51%. In early February, the yield on the 2-year had been around 4%. According to data from Trade Algo, the 10-year note has risen 35 basis points since the start of February, while the 2-year note has risen 41 basis points.

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In spite of the continuing moderation in [year-on-year] inflation, markets are coming around to the threat that the Fed will maintain a 'higher for longer' stance [on interest rates]. According to Vishnu Varathan, Mizuho Bank's head of economics and strategy, he indicated that there was also a threat that the January employment report would be hotter than expected.

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“We think this could contribute to the run-up in UST yields, together with a greenback that is more buoyant than it has been for most of January and February, while stocks are continuing to be dampened, if not dragged, by these factors,” he added.

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There was a dramatic drop in the stock market last week, with the S&P 500 and Nasdaq having their worst week in almost two months.

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What are the best ways for investors to take advantage of higher yields? Here is what the pros have to say about it.

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Stay invested in cash

In the midst of market volatility and as rates remain high, a number of big investors, such as Ray Dalio and Dan Niles, have recently agreed that cash remains one of their top investment recommendations. Despite a bear market last year, cash became a popular investment choice for investors, and yields went up as well.

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“Investors now have many more options when it comes to their investment time horizon and risk tolerance, such as short-term CDs, money market mutual funds, and even 3- or 6-month U.S. Treasury bills,” Luis Alvarado, global investment strategist at Wells Fargo Investment Institute, tells Trade Algo.

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As of Monday, the three-month U.S. Treasury bills - which Niles also recommends - were yielding 4.77%, while the six-month bill yielded 4.93%.

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Buy high-quality or short-term fixed income

There is also a strong preference for high-quality credit and short-end government bonds at the BlackRock Investment Institute, "as interest rates stay higher for longer.”

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“After yields surged around the world, fixed income finally offered the opportunity to earn 'income'. Having been starved for yield for years, this has boosted the allure of bonds after investors were starved for yield for years," it said in a note last week, adding that there is a "brightening of the investment-grade bond market."

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“Investors ought to hold around 2% of cash in their portfolios, and they should use short-term fixed-income assets (anything that matures within two years or less) as a proxy to cash,” Alvarado said.

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There are two types of tactical portfolios offered by Wells Fargo Investment Institute: those with a 2% allocation to short-term fixed income (for "aggressive growth investors") and those with a 17% allocation (for conservative income investors).

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ETFs

There are some income ETFs that are yielding more than 10%.

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As a result of this, one such fund, the JPMorgan Equity Premium Income ETF, has raked in $2.8 billion in net flows this year, according to Trade Algo. Among the funds with the largest net orders from retail traders, according to a report published by JPMorgan, was this one.

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Trade Algo also screened for income or corporate bond funds which invest in stocks and bonds that are yielding more than 10% in dividends.

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The future

It is recommended that investors ride this wave until the Fed takes a step back, according to Alvarado.

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“Eventually, once the U.S. recession is underway and the Federal Reserve begins to cut interest rates, we believe investors should deploy cash and short-term fixed income into more “risk-on” assets like equities, but evidently we are not at that stage yet,” he told Trade Algo.