3 Reasons Why Suze Orman Thinks Bonds Are Back in Favor

Now is the time to buy bonds, here's why.

Last year, Suze Orman stated that investing in bonds was a bad idea. In her recent Women and Money podcast, she argues however that now is the time to invest in bonds. Based on the current economic environment, she gave three reasons why bonds are back in favor.

1. The Federal Reserve's interest rate hikes

During the pandemic, interest rates were close to 0%. Low interest rates kept the returns on bonds, saving accounts, CDs and money market accounts low as well. Since then, inflation has risen quickly, hitting 5.4% one year ago and peaking at 9.1% in June 2022. To combat high inflation, the Federal Reserve began raising near-zero interest rates in March 2022. Since then, the Fed has raised rates by 3%, the highest jump since the 1980s.

As a result of the rate increases, the 2-year Treasury has hit a 15-year high at 4.26% and the 10-year Treasury has hit 3.829%, an 11-year high. Orman states you can now get better bond rates and if you are willing to tie your money up longer, you can get 4% to 4.25%. This makes it worth investing in bonds. 

2. The stock market is riskier

Since the Fed has started its rate hikes, both the S&P 500 and Dow Jones Industrial Average have hit new lows. The Dow at the end of September closed below 29,000 for the first time since November 2020. In September alone, the Dow fell 9%, its worst month since March 2020, the onset of the pandemic.

Orman observes that because the Fed started to raise interest rates, "everybody and the markets started to go down because people were afraid of the economy," and people have started to take money out of the stock market because it is more risky than bonds. Bonds are a relatively safe investment and can provide stability in a portfolio, which is especially important in volatile markets. Orman believes that bonds are a good option for investors who are looking for stability and income.

3. Interest rates will come down eventually

According to Orman, "sooner than later interest rates are going to have to start to come down again, because the Feds are going to reach their target hopefully." If you buy a bond when rates are high, then you will lock in that interest rate. When interest rates start to go down, "then the price of your bond will go up and increase in value," Orman states. 

In other words, because you have a bond paying a higher interest rate, your bond will be more attractive when interest rates fall. This drives up the demand and price for the bond. Now that interest rates are up, and they may go up even more, Orman recommends dollar-cost averaging when purchasing a bond or bond fund.