Here’s our Mailbag Club email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We cannot provide personal investment advice. We will only consider more general questions about the investment process or portfolio shares or similar industries. Why would anyone invest in the 10-year Treasury when you can get higher returns holding money right now, let alone other types of investments? Why does the 10-year continue to rise and thus raise mortgage rates, affecting many stocks while the Fed is cutting rates? Appreciate your help! — SB Addressing the first part of the question, investing in the 10-year Treasury, with a current yield of about 4.75%, is all about locking in the rate of return. Remember, the interest rate (or yield) on bonds — corporate debt or US government Treasuries — is always fluctuating. Keeping cash in a money market account like Fidelity’s SPAXX is actually yielding just over 4% right now, and with a little searching you can find a certificate of deposit (CD) paying closer to 5% . However, it is important to consider the timelines. (These rates could rise given the rise in Treasury yields on Friday on the back of strong jobs data.) Fidelity Government Money Market Fund (SPAXX), like most market accounts money, given their high levels of liquidity, is highly concentrated in short-term debt. The return that the fund can provide will depend entirely on the rates it can lock in as these existing securities mature and unwind, requiring new securities to be purchased at updated rates. If rates rise in the near term, the fund’s overall interest rate will rise to the benefit of those holding cash in the securities. However, the opposite is also true as the fund’s yield will fall after the old securities are removed if the ones that replace them have lower yields. In other words, the yield is not locked in for any significant period of time as over 50% of the SPAXX portfolio is refreshed every week. Debt prices move inversely to their yields. Buying a 10-year Treasury, however, allows the buyer to lock in a yield to maturity. The return may sometimes be lower than that offered in cash, but it is also set for a much longer period of time. If you are someone who wants to lock in an income level, even if not the highest possible in the very near term, this will be attractive. (The CNBC Investing Club only owns stocks and cash.) Imagine, for example, that you had $1 million to invest with the goal of achieving passive income. You have the option of investing in 12-month CDs at 5% or a 10-year Treasury at 4.75%. Buying the CD will guarantee you an income in the first year of $50,000 (before tax), however, what you make in the second year and beyond will depend entirely on the rate you can lock in after the first year when the CD matures, and the funds are released. Going with the 10-year Treasury will guarantee you an income of $46,000 (before tax) for the next 10 years. Depending on your needs and investment horizon, you may be willing to give up some income in the first year for guarantees in years 2-10, especially if you think rates will decrease over the long term. This brings us to the second part of the question, why the 10-year Treasury yield remains high when the Federal Reserve is easing short-term interest rates. Starting with a whopping 50 basis point cut in September, the Fed cut interest rates three times last year by a total of 100 basis points, or 1 percentage point. When we talk about Fed rates, we’re talking about the overnight bank lending rate. Central bankers projected two more cuts in 2025. While the Fed may try to reduce the longer end of the yield curve, it could only directly affect the overnight rate. It can try to influence the longer end of the curve by buying and selling securities in the open market – and as a buyer with essentially unlimited firepower, it certainly has influence. However, the central bank cannot directly influence the rate. As a result, rates at the longer end, where the 10-year lies, tend to reflect the market’s expectations of future inflation. These expectations then trickle down to all other forms of debt. So mortgage rates, for example, affect long-term government bonds. However, they must then assess the added risk of lending to private borrowers – taking into account the inherent risks of buying residential real estate. That’s why, despite the Fed’s rate cuts in the short term, we haven’t seen the progress we’d like in the long term. The Fed can give its view, but it is the view of the market as a whole that determines long-term interest rates. It’s those long-term rates that are being factored into the calculations that ultimately determine everything from mortgage rates to the fair value of stocks. (See here for a complete list of holdings in Jim Cramer’s Charitable Foundation.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charitable trust portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY ALONG WITH OUR STATEMENT. NO OBLIGATION OR FIDUCIARY DUTIES EXIST, OR ARE CREATED BY VIRTUE OF YOUR RECEIVING ANY INFORMATION DIRECTED IN CONNECTION WITH THE INVESTOR CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
Here’s our Mailbag Club email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We cannot provide personal investment advice. We will only consider more general questions about the investment process or portfolio shares or similar industries.
Why would anyone invest in the 10-year Treasury when you can get higher returns holding money right now, let alone other types of investments? Why does the 10-year continue to rise and thus raise mortgage rates, affecting many stocks while the Fed is cutting rates? Appreciate your help! – SB