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Never mind Thursday’s selloff in the stock market. Income-seeking investors are primed to pick up a risk-free return exceeding 5% now that the yield on the 2-year Treasury has spiked to highs last seen in 2007. Traders flinched when the ADP payrolls report for June came in much hotter than anticipated. Private sector employers added 497,000 jobs last month , blowing away Dow Jones’ consensus estimates for a gain of 220,000. Not only does this finding suggest that Friday’s payrolls report could be huge, but it also implies that the Federal Reserve will have to continue its policy tightening in order to cool the economy. Indeed, the yield on the 2-year Treasury – which is especially sensitive to Fed policy – leapt to 5.12%, its highest level since June 15, 2007. The rate on the 10-year Treasury also jumped over 4% at its highest point of the day. Bond yields move inversely to prices. US2Y US10Y YTD line The 2-year yield popped to levels last seen in 2007. The development is a positive one for income-seekers who want to pick up risk-free yield, but who also want to lock in these high rates for a longer time compared to the shorter-term T-bills that are available. Indeed, some firms are calling for investors to add longer-term issues to their portfolios, thus enhancing duration exposure. Duration is a measure of a bond’s price sensitivity to interest rate changes, and longer-term bonds tend to see the most volatility in their prices as rates change. “In our opinion, all else equal, we are comfortable adding additional duration exposure and would be more aggressive in doing so when U.S. 10-year Treasury yields cross above 4%,” wrote Luis Alvarado, global investment strategist at Wells Fargo, in a report earlier this week. How to buy in To purchase Treasurys directly from the U.S. government, you can set up an account on TreasuryDirect.gov . You’ll need to link your bank to this account. Two-year notes go up for auction every month , and 10-year Treasurys are auctioned every quarter. For investors with an eye on the shortest-term notes, 4-week, 8-week, 13-week and 26-week T-bills are available every week. You can also buy Treasurys through your brokerage firm. Just watch out for fees and minimum purchase requirements. Some firms charge fees for broker-assisted trades, while others require that you buy at least $1,000 in Treasurys. Meanwhile, if you’re buying these instruments from the government directly, you’re subject to a minimum purchase of amount of just $100. Treasurys are backed by the full faith and credit of the U.S. government, which helps investors sleep at night. But don’t throw all your cash into these safe assets. If inflation outpaces the yield you’re earning, it could erode the real rate of return earned on these notes. You may also miss out on investment opportunities in the stock market. Indeed, one investor’s selloff is another investor’s discount shopping event. – CNBC’s Michelle Fox and Nick Wells contributed to this report.
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