Stop Chasing Long-Term Bonds: Why the 'Belly' of the Yield Curve Is Your Best Bet
Long-term bonds can be a trap in the current market. Discover this simple strategy to earn higher yields with short-term Treasuries and corporate bond funds.
While anxious eyes watch oil prices and inflation indexes, the best news for savers and income investors is hiding in the bunker often called the belly of the yield curve. So far in 2026 through the start of June, two-year Treasury yields have leapt from 3.46% to 4.01%, and three-year yields from 3.53% to 4.06%.
At the same time, despite chatter about inflation pushing up interest rates at the long end, these show gentler climbs, with 30-year T-bonds crawling from 4.86% to 4.97%. This tells us traders anticipate the surge in inflation to persist through 2029, then recede toward the Federal Reserve’s 2% target.
It also means savers and short-term-bond collectors have it better than long-term-bond investors. If yields climb, risk to principal and likely lost opportunities do not justify locking in 5% or 5.25% for a decade or longer. (Prices and yields move in opposite directions.) No wonder inflows to short and ultra-short bond funds are soaring. Where to best position your money on the yield curve is rarely so clear-cut. Read on for tips on minimizing costs and to see opportunities for extra marginal yield.
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The easiest path to higher yields
The simplest and least costly approach is to accumulate short notes and bonds directly, either using the Treasury Direct website or a brokerage account. This is a freebie if you have cash reposing in, say, a Fidelity brokerage money market account currently paying 3.33%.
Switching to two-year 4.0% T-notes means for every $10,000, you see an extra $67 a year — enough to notice — assuming you keep the principal until maturity. There are also my favorite full-faith-and-credit federal agency notes, such as the Federal National Mortgage Association’s 4.3% notes due in May 2028. Unless you will need the money before maturity, this is sweet.
Banks usually offer a tad more on certificates of deposit, and there is also no cost.
Shop at a bank-rate site, or see if your brokerage posts CD rates noticeably higher than the Treasury pays. Fidelity, with the 3.33% money fund, lists 3.90% for various 90-day CDs and slightly upward of 4% for a ladder of six-, 12-, 18- and 24-month bank deposits. I am not a fan of longer-dated CDs because they do not pay suitably higher rates.
You can also shop for and compare the best CD rates using this Bankrate tool:
Tactical ways to earn higher yields
To angle for still higher income with equally short maturities, you will bear some expenses, but they can be trivial. I generally endorse short-dated defined-maturity corporate bond funds; Vanguard’s new suite of these charges 0.08% in fees and includes Vanguard Target Maturity 2028 Corporate Bond (symbol VBCB), an exchange-traded fund whose portfolio is valued to yield 4.50% to maturity; the fund terminates in December 2028.
That is long enough for a defined-maturity fund. The yield to maturity on a similar Vanguard fund slated to end in 2035 is just 5.25%.
Another higher-yield idea in the belly is a high-yield bond fund with a pile of bonds due to mature in a couple of years. This is a face-off between the established PGIM Short Duration High Yield ETF (PSH) and newcomer Columbia Short Duration High Yield ETF (HYSD).
Both are actively managed (which matters in high yield), charge low enough expenses (between 0.4% and 0.5%) and distribute close to 6% — more than enough to absorb the cost. There is little to gain now entering a long-term high-yield fund, though if you hold any with embedded unrealized gains, leave it be. You have done extremely well.
Again, if I have written zero that you do not already know, at least accept my affirmation that when every half percentage point matters, you can get it safely and effortlessly and at minimal cost. Banks and fund companies are not always your friends, but in the area of inexpensive short-term cash alternatives, they are worthy partners.
A financial advisor can help you build a strategy for saving, investing and reaching your long-term goals. Use the tool below to find an adviser who can help.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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