Bonds with longer maturities usually yield more than bonds with shorter-term maturities. After all, investors should be better compensated for locking up their money for a longer time. However, that's not the case today, which has caused a lot of investors to say, "why should I buy a longer-term bond when I can get the same yield with a shorter-term one?"
It's a logical question. After all, a six-month Treasury yields about the same as a 20-year Treasury. It may seem counterintuitive, but there are reasons to invest in longer-term bonds even though shorter-term ones may offer better yields.
Yields of all maturities have risen significantly since the start of the year
Source: Bloomberg, US Treasuries Actives Curve.
As of 10/24/2022. Past performance is no guarantee of future results.
The pitfalls of overconcentration in short-term maturities
Interest rates of all maturities have increased substantially since the beginning of the year, as the Federal Reserve has been aggressively hiking short-term rates in an effort to bring down inflation. The Fed has projected an additional 125 basis points of rate hikes this year, followed by more in 2023 (a basis point is 1/100th of a percentage point, so 125 basis points is equal to 1.25%). If those projections prove accurate, the federal funds rate would rise to nearly 5% by March 2023. It may be tempting to invest in short-term investments while the Fed is hiking rates and plan to invest in longer-term bonds later, after their yields are higher, but there’s a potential downside to this strategy: reinvestment risk.
Reinvestment risk is the risk that when the bond matures, or is called, interest rates may be lower than when you originally bought it, and you may have to reinvest the proceeds at that lower yield. A primary benefit of investing in longer-term bonds is that you’re locking in that yield, and should not be subject to the same degree of reinvestment risk as you would be with short-term bonds.