It may seem like second nature to hide in cash during these volatile markets, but according to UBS, investors should buy bonds while yields are still good. The Federal Reserve has been on its rate hike campaign for about a year and many suspect it will start another rate hike next Wednesday. The tightening of central bank policy has led to higher yields on bonds, certificates of deposit and other fixed income instruments. Bond yields move inversely to their prices. While banks are willing to pay more interest on CDs and savings accounts, investors who seek refuge in these cash products risk missing out on solid bond income. They also run the risk of the real value of these deposits being swallowed up by inflation, which remains high even as it slows down. “Cash deposits have become more attractive to many investors as central banks have tightened their policies,” UBS strategist Vincent Heaney wrote in a Thursday report. “But this appeal is superficial and we prefer to hold onto yields and stick to a diversified portfolio.” He noted that a balanced portfolio – one that is 60% allocated to stocks and 40% allocated to bonds – outperforms cash about 80% of the time over a five-year period. That’s not to say that investors should immediately invest all their money in bonds. Instead, they can make incremental investments in these assets over time, Heaney said. This is known as dollar-cost averaging. You also don’t have to risk too much to pocket those attractive bond yields, especially as concerns about a widespread recession weigh on investors. The rate on the 6-month Treasury bill is 4.69%, while the 2-year Treasury yields 3.84%. “We prefer high-quality government and investment grade bonds, which should be more resilient in the event of a recession,” Heaney added. – CNBC’s Michael Bloom contributed to this report.
Resist the urge to hide in cash. How to increase returns in your portfolio, according to UBS