Go Long, Go High: Bond Investing As Credit Tightens

As the credit market grows more stringent, investors should consider high-quality, longer-term bonds. Here are some fixed-income strategies.

If the latest Fed rate hike and regional banking jitters have you worried about your fixed-income portfolio, you're not alone. Tighter credit conditions and market volatility likely lie ahead. So how should fixed-income investors react?

Go long and go high—as in long duration and high quality, Schwab experts suggest.

In past cycles, as the federal funds rate peaked, intermediate-term bonds' total return tended to outperform that of short-term bonds during the subsequent 12 months. That's why adding duration might make sense now. With markets anticipating a pause in rate hikes, and as more stringent lending standards start to burden economic growth, intermediate- to long-term yields could continue to trend lower while their prices trend higher.

"Long-term yields can be held down by the fact that every rate hike intensifies the risk of recession and potential financial problems," says Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. "The credit tightening issues are with us already and will probably continue to intensify."