Investors can still enjoy solid yields in the bond market right now, but selectivity matters, according to Charles Schwab's mid-year outlook. The firm expects inflation to stay sticky and the Federal Reserve to remain patient. However, a rate hike seems a little bit more likely after the June Fed meeting and latest hot inflation report, said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. As a result, the bond market's bumpy ride will likely continue, he said. In the Treasury market, the 10-year note yield will likely stay in the range of 4% to 4.5%, Martin noted. Bond yields move inversely to prices. However, he cautions there's a risk the yield could turn higher. Because of that, now is not the time to add duration, Martin said. Duration measures a bond's price sensitivity to interest rate fluctuations, and bonds with longer maturity dates tend to have greater duration. "They tend to be the most sensitive to interest rate changes, and we do see a risk that long-term interest rates stay elevated or even rise a little bit further from here," he said in an interview with CNBC. "More importantly, we don't think that investors are going to miss the opportunity to invest at the yields we're seeing right now." He sees three areas of opportunity for income investors in the second half of 2026. Investment-grade bonds Investment-grade corporate bonds offer high-quality income, with yields that average around 5%, Martin said. Spreads remain tight, which means the yield advantage corporates enjoy over Treasurys is low. However, that's due to strong fundamentals, he said. "Corporations are seeing strong profits, and they have healthy balance sheets," he said. "That low risk premium isn't necessarily scaring us away. We are focusing more on the absolute yields and the income you can earn." Martin said investors should be diversified throughout investment-grade sectors. There are a host of exchange-traded funds available in the space. Bump up high-yield exposure Investors should also consider shifting their allocation to high-yield bonds up by a percentage point or two, Martin said. The specific allocation depends on the investor's risk tolerance and time horizon, he noted. To be sure, high-yield bonds are considered riskier than investment-grade corporates — which means there is the potential for defaults. However, the overall market is better quality than it once was, with higher-rated credits now taking up more of the Bloomberg U.S. Corporate High Yield Index, Martin said. "The risk of default is always a risk with high yield bonds, and it's still present today. But we think the risk to the broad market is relatively low," he said. "A key trend that we think really helps support our case with high-yield bonds is the shifting makeup of the bonds that make up the high-yield bond market." Individual investors would have a tough time building a portfolio of high-yield bonds, Martin said. However, can get diversification through mutual funds and ETFs, like the Schwab High Yield Bond ETF (SCYB) or the iShares Broad USD High Yield Corporate Bond ETF (USHY) . The former has a 30-day yield of 6.88% and 0.03% expense ratio. The latter has a 6.96% 30-day SEC yield and expense ratio of 0.08% SCYB YTD mountain Schwab High Yield Bond ETF Preferred securities Lastly, investors can snap up yields of around 6% in preferred securities , which also offer a tax advantage. The assets have features of both stocks and bonds. They trade on exchanges like stocks, but also have par values and pay a stream of income like a bond. Most preferred securities pay qualified dividends, Martin said. That means they are subject to a rate of 0%, 15% or 20%, depending on the investors' taxable income. "Those after-tax yields can look even more attractive when you compare them to other fully taxable alternatives," he said. The assets also have long maturities, or no maturity at all, so they can be sensitive to interest rate fluctuations. However, while Martin is cautious on long-duration bonds, that's not the case with preferreds. "They're not as correlated to long-term interest rates as you might think, based on their maturities. They're actually correlated more to to the credit risk side of the equation and the equity markets," he said. "That is where we're a little bit more comfortable right now, because the economic outlook is relatively favorable." ETFs in the space include the iShares Preferred and Income Securities ETF (PFF) , which has a 6.32% 30-day SEC yield and a 0.45% expense ratio, and the Invesco Preferred ETF (PGX) , which has a 6.33% 30-day SEC yield and an expense ratio of 0.50%.
<small>Source: CNBC</small>
