There aren’t many safe places to put your money in 2022. Almost every major asset class is down this year, from equities to long-term bonds and even traditional safe-haven assets like gold. There just weren’t many places to hide.

Since the beginning of the year, the S&P500 is about 21%, and the iShares Core US Aggregate Bond ETF (AGG (opens in a new tab)), a popular “bond market” indicator, is down almost 17%.

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The story actually gets worse with longer-term bonds. The iShares 20+ Year Treasury Bond ETF (TLT (opens in a new tab)), which tracks the performance of a portfolio of US government bonds with maturities of 20-30 years, is down 35% year-to-date, performing significantly worse than stocks!

Even so, if bought correctly, bonds are still a viable option for your safe money… that part of your portfolio that you can’t afford to lose.

“U.S. Treasury securities are the only true risk-free investment,” says Chase Robertson, principal of Robertson Wealth Management, a registered investment adviser (RIA) based in Houston, Texas. “But for them to be truly risk-free,” Robertson continues, “you have to hold them until they mature. Because bonds, like any asset, can see their prices fluctuate from day to day. ‘at maturity, the greater the sensitivity. bond prices are linked to changes in interest rates.’

Without getting too technical, the term for this sensitivity is “duration”. And all other things being equal, the longer the term to maturity, the higher the duration and therefore the higher the sensitivity to upward market returns. This is why the iShares 20+ Year Treasury Bond ETF has taken such a beating this year. Between soaring inflation and the Fed’s decision to end asset purchases earlier this year, bond yields hit some of their highest levels in two decades.

Short-term bonds are the least sensitive to interest rate fluctuations. As a simple example, a two-year zero-coupon bond has a modified duration of just under 2. Put simply, this means that a 1% change in market yields causes a short-term change in the price of about 2%. And naturally, any capital loss reduces to zero at maturity, assuming the bond was purchased at or below face value.

The Sweet Spot for Investors Today

In a “normal” market, long-term bonds always pay more than short-term bonds. This is the benefit we get from taking more risk. But today, that is not the case. The yield curve is inverted, which means short-term yields are actually higher than most long-term yields. At press time, the 1-year yield is the highest point on the yield curve at 4.6%, very slightly above the 4.5% yield on the 20-year Treasury.

So if you’re looking for a place to store your cash safely…this is it. After one year, your sensitivity to interest rates is minimal, which means that you would not run a significant risk of capital loss if you were to sell the bond before maturity. And frankly, a 4.6% return isn’t bad at all by the standards of the last 20 years.

Should you consider long-term bonds?

Since the 1-year bond has a higher yield and less risk, why would anyone buy a long-term bond?

It’s really a matter of timing. For example, if you know you’ll need money for a major expense in exactly 10 years (say, college for grandchildren), it might be a good idea to lock in a 10-year rate. Assuming you didn’t need to sell the bond before maturity, your risk is still zero. Plus, you lock in the rate. If you were to buy a bond with a shorter term, you run a reinvestment risk. You have no idea what the rate will be in a year or two, and you might get a lousy rate when it’s time to reinvest,

“Longer-term bonds can also be used for speculative purposes,” says Douglas Robinson, founder and chairman of RCM Robinson Capital Management, a San Francisco, Calif.-based RIA specializing in managing Treasury funds. “Any asset that falls more than 30% in a year, as we’ve seen in longer-term Treasuries, may also rise by a comparable amount if market yields fall.”

Long-term bonds have their place. But for the money you want to keep absolutely safe, stick with 1-year bonds for now.