The whole process works the other way, too, with falling yields driving bond prices up. That’s why bond investors have done so well during the past couple of decades. Now, however, bond prices are too low to fall much more, and improving economic conditions are likely to drive yields upward for some time.
This can be good news for stocks, as money fleeing bonds often moves into stocks, driving prices up through higher demand. But many fixed income investors, especially people in or near retirement, don’t want to put everything into stocks because of the high risks.
The solution? For now, old-fashioned bank savings look best. They’re not very generous with savings accounts yielding just 0.112%, and five-year CDs just 1.131%. But with bank savings, you are insured against loss – your principal is far safer than in a bond.
And bank savings are liquid. In a couple of years, bond yields may be considerably higher. If they show signs of topping out, investors will be able to buy bonds, earn more than they can today and face less risk of loss from a further rise in yields.
For now, given the improving economic signs, fixed-income investors are probably better off emphasizing safety and flexibility, waiting for a chance to pounce on higher yields later.