Historically, treasury bonds have only made sense for conservative investors.
People buy these bonds because they want stability, income, and they need to sleep well at night. And since treasury bonds are backed by the full faith and credit of the United States, you can rest assured that money you invest will be returned (with interest).
As a young investor, I remember despising these assets. The main reason was that bonds were “boring” and didn’t give me a chance to book above-average returns.
Boy was I wrong!
The truth is, bonds can perform two roles for investors (depending on the circumstances).
Yes, they can provide stability and safety.
But in the right situations, bonds can actually help you grow wealth quickly! And we’re in one of those situations right now.
A Perfect Setup for Boring Bonds
Today’s bond market is ripe with opportunity.
I’m sure you noticed that interest rates have spiked over the past several months. This is both in response to the Fed’s fight against inflation, and also a function of the U.S. Treasury saturating the market with new issuances.
When interest rates rise, bond prices drop.
This is because every treasury bond has a contractual obligation to pay specific payments to investors, and to return $1,000 when the bond matures.
So if interest rates move up, the bond price must trade lower. That way, new investors can buy at a lower price — and realize the prevailing interest rate while holding the bond until it matures.
CURRENT bond prices are directly tied to interest rates. So the higher rates trade, the lower bond prices fall. (And vice versa.)
Higher rates have driven bond prices lower… A LOT lower…
But these lower bond prices now allow you to buy treasury bonds that pay more income. And these bonds also have the potential to trade sharply higher.
How much higher?
Well, long-term bonds are much more sensitive to interest rates. So these bonds were A: hurt more by rising rates and B: could recover more from a pullback in interest rates.
Just check out the chart of the iShares 20+ Year Treasury ETF (TLT) below:
After losing 50% of its value, this “boring bond” fund could easily stage a 50% rebound if rates begin to pull back.
Two Ways to Capitalize on Bonds
If you believe that interest rates have peaked (or are close to peaking), there are a couple ways you can profit from a rebound in bond prices.
First, you can buy actual treasury bonds in your brokerage account. Most reputable brokers have a list of treasury bonds for sale, and you can pick which bonds make the most sense for your financial situation.
I recommend leaning towards long-term bonds that mature in 20 or 30 years. These bonds are the most sensitive to interest rate fluctuations. And at the same time, they give you a great long-term source of income even if interest rates fail to pull back.
A second option is to buy shares of TLT.
This fund invests in an assortment of long-term treasury bonds. And the price of TLT fluctuates based on prevailing interest rates for long-term treasury bonds.
If you hold TLT, you’ll also receive your share of interest from these bonds, paid in regular distributions directly into your brokerage account.
You may also choose to buy option contracts for TLT. I currently own a few December call contracts that I expect to trade higher over the next few weeks.
With bonds oversold and interest rates likely to pull back, this may be a perfect time to build an investment in “boring bonds” — just don’t be surprised if you lock in some exciting returns!
Here’s to growing and protecting your wealth!
Zach
P.S. If you want to see the most aggressive trades plays that I’m trading in my own account, make sure you check out the Speculative Trading Program. Members receive real-time alerts every time I open or close a new position. I’d love for you to be able to shadow my own family’s trades!
