Your Questions Answered
Kiplinger's Personal Finance|June 2023
Kiplinger readers have inquiring minds when it comes to investing. Here's what you're asking about.
KIM CLARK
Your Questions Answered

NO DOUBT ABOUT IT, YOU ARE A thoughtful and inquisitive group. You send us many e-mails with astute questions about investing. We try to respond to most of them individually (although we can never give individual investment advice). Here are some queries about topics we thought many of you might be wondering about as well.

Why would anyone lock up money for 30 years when you can get a higher yield on a shorter-term bond? - RICHARD READY SHAWANO, WISC.

Take a moment to consider why short-term yields are more generous currently. Typically, the longer you lock up your money, the higher the interest rate you receive. But when investors see a recession looming and therefore expect interest rates to fall, they bid up long-term bond prices in anticipation, sometimes pushing yields on long bonds below short-term yields. (Prices and yields move in opposite directions.) That creates a “yield curve inversion.”

If we do head into a recession, look for the Federal Reserve to cut short-term rates—but rates will likely fall across the board. So you could end up wishing you had locked in today’s long-term rates, says Kathy Jones, chief fixed-income strategist for the Schwab Center for Financial Research. Long-term bonds also offer a higher potential for capital gains if rates head lower. The longer a bond is from maturity, the more sensitive its price is to changes in interest rates. A drop in interest rates could allow you to sell your long-term bond for a profit.

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