Rising interest rates have made fixed-income assets more attractive, and a question that is bothering investors is whether they should opt for long-term or short term bonds. Charles Schwab believes it is better to opt for longer maturity and a lower yield over shorter maturity and a higher yield.

“The reason is that an investor can have greater control over their cash flows, rather than being subject to reinvestment risk—that is, the risk of having to reinvest a maturing security at a lower interest rate in the future,” writes Cooper Howard, Director and Fixed Income Strategist, Charles Schwab.

The asset manager argues that historically longer-term bonds have had higher yields, but the yield curve is inverted currently and short term bonds are giving higher yields as the US Federal Reserve has pushed up short-term rates up.

The issue that Charles Schwab is focusing on is the reinvestment risk that comes with investing in shorter-term fixed-income assets, taking the example of the performance of US Treasury bills right before the 2008 global financial crisis.

Additionally, the investment manager says that yields on all types of bonds do not rise when the Fed raises rates, as short term securities are linked to the federal funds rate whereas longer-term rates are tied to the outlook for growth and inflation.

“Going forward, it’s likely that the Fed will have to cut interest rates due to slower economic growth and the recent stress in the banking sector. The market now expects that the Fed will cut interest rates sharply later this year. This should cause short-term yields to fall, as well,” as per Howard, who adds that investors of short term bonds may be faced with even lower rates than current long-term rates.

Meanwhile, Charles Schwab says that this doesn’t apply to investors in individual bonds but also for investors in bond funds. The investment management firm suggests that the recent rise in longer-term yields presents an opportunity to investors to lock in those yields.

View the complete insight here.