Should You Invest in a Bond ETF Right Now? Here's What History Suggests.

Often perceived as a docile, shelter-from-the-storm destination, the bond market isn't for the faint of heart these days. The 10- and 30-year Treasury yields are residing around the highest levels in 24 years.

With the U.S. national debt standing at $40.3 trillion as of Oct. 7, or roughly seven times Nvidia's market capitalization, bond investors are demanding more compensation to buy Uncle Sam's bonds. Ten-year Treasuries auctioned on Oct. 7 were sold with a yield of 5.3%, the highest since 2000.

High bond yields may be more positive than investors realize. Image source: Getty Images.

All that sounds ominous for fixed-income exchange-traded funds (ETFs), such as the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) and the Vanguard Total Bond Market ETF (NASDAQ: BND). But, believe it or not, now may not be the time to ignore these bond ETFs.

High yields may be enticing

As with dividend yields and stock prices, bond prices and yields move inversely. So when yields rise, bond or fixed income ETF prices decline. That explains why these iShares and Vanguard ETFs highlighted here are off 8.4% and 2.6%, respectively, year to date.

Those slumps, coupled with turbulence in the bond market, may suggest that these fixed-income ETFs and their peers should be abandoned today, but history tells a different story. Investors typically buy bonds for income, and by purchasing high-yield bonds or fixed-income funds today, market participants are locking in higher income.

Put simply, an investor purchasing a 10-year Treasury bond today with a yield of 5.3% locks in that rate. Still, if Treasury prices rebound in a few months, investors buying the 10-year bonds at lower yields get, well, lower yields and thus less income. That's one reason why the 5.6% 30-day yield found on this iShares ETF is potentially appealing today.

Another reason is that higher starting yields can portend better long-term performances for bonds. Obviously, bonds and ETFs such as these iShares and Vanguard products are long-term instruments, implying that today's high yields aren't as off-putting as they appear at first glance.

Income and value

Admittedly, it's not an apples-to-apples comparison, but there are some similarities to buying bonds when yields are high and buying stocks after prices have materially pulled back. Think of it as fixed-income value investing. Bond prices slump, and they may offer value, all while investors are being compensated for perceived risk.

Some experts agree that today's elevated bond yields are indeed value signals. That's one potential positive. Another is that high bond yields bolster investors' chances of beating inflation.

Even if inflation declined to the Federal Reserve's desired goal of around 2% today, that's still well above the 1.1% dividend yield on the S&P 500, indicating that the income offered up by a basic equity gauge isn't enough to keep pace with rising consumer costs. That enhances the allure of the Vanguard Total Bond Market ETF's 30-day SEC yield of 5.1%.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.