The bond market has disconnected from the stock market in recent months. Despite the Federal Reserve cutting interest rates a full point, bond yields have ticked higher. Some see the 10-year Treasury, the bellwether for the bond market, trending towards a 5% yield.
That’s not too much further from its current level near 4.7%. And it suggests that most of the bond market’s move higher may have already occurred.
If that’s the case, now may be an ideal time to lock in relatively high bond yields. Should rates move materially lower, bond holders will see the price rise as yields drop. And at the 5% level, investors are getting their best yield on bonds in over 15 years.
One simple way to hold long bonds is the iShares 20+ Year Treasury Bond ETF (TLT). This ETF holds a basket of long-dated U.S. Treasury bonds, so it lacks the repayment risk of long-dated corporate bonds.
The ETF trades at a 52-week low right now, and offers a 4.3% yield. If bond yields trend lower, TLT could stand to see sizeable returns, while also paying a better payout than most dividend stocks right now.
Action to take: Investors should move some money to TLT as a way to play today’s relatively high bond yields and lock in those returns now.
For traders, TLT does have robust options trading. The August 15 $90 calls, last trading for about $2.75, could see high double-digit returns if bond yields drop in the first half of the year.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.