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The Fed’s most aggressive rate hike campaign in decades crushed the bond market in 2022, sending the iShares Core US Aggregate Bond ETF down 13%.

After rebounding earlier in the year, bonds have produced more losses in recent days as yields have risen sharply. Bond prices go down when yields go up.

Investors buy bonds for a safe income, not for double-digit losses. But there is a silver lining in wiping out the bond market. Yields have risen to levels not seen in years, giving impatient investors a chance to boost their portfolios with bonds with the potential for high income and capital gains.

For the retirees and those about to retire, the question is where should they invest in the vast world of fixed income? What is the correct duration? Short-term treasuries – including the 3- and 6-month treasury bills – are sporting yields above 5.4%. That’s tempting. But if the Fed starts cutting rates in 2024, long-term bonds would be the better investment.

Here are three things to keep in mind as you build your bond portfolio.

1. Begin to stretch the duration

If you’re in or close to retirement and your goal is to generate income and reduce portfolio risk, “we suggest investors get out in term and buy medium-term bonds, in the five- to 10-year region,” says Cathy Jones, chief fixed-income strategist for the Schwab Center for Financial Research.

Jones suggests a tiered approach so that investors can spread out different bond maturities over time. (A bond ladder is a portfolio of individual bonds with different maturities, designed to provide income while reducing exposure to interest rate fluctuations.)

Aim for the average duration of a graded bond portfolio to about six years, Jones says. Those can generate a rate of 5%-5.5% depending on how much credit risk you want to take. “It was the highest return you could get in about a decade and the highest real rates we’ve seen in a very long time,” she says.

Similarly, Jeffrey Elswick, director of fixed income at Frost Financial Advisors, recommends delivering bonds from two to 10-year maturities, with an average maturity of about five years. “You’re getting a higher yield than we’ve had for most of the last decade,” he says.

Elswick says it makes sense to risk a little longer — but not by much. “We recommend not getting too much exposure over the long term,” he says, since they have the lowest returns and the highest risk. “You will give up more income in the near term by investing in 30-year securities rather than 5- and 7-year notes.” The short term carries less price risk, but long-term bonds provide greater yield and total certainty of return–a crucial factor when you have to think about financing the next 20 to 30 years of retirement.

2. Short-term bonds look great now, but don’t forget the reinvestment risks

Treasury bonds and short-term money markets are sporting returns of up to 5%. Shouldn’t retirees set aside a large portion of their fixed income portfolio in this corner of fixed income and the comfort of security and great return?

actually no. Consider reinvestment risk, or the risk of having to reinvest maturing bonds at a lower interest rate in the future. Essentially, these higher yield levels are transient and likely won’t be very high when the bonds mature and you want to reinvest your money.