Interest rates have been in the news a lot recently, with the Federal Reserve’s short-term rate hikes negatively impacting financial markets, and prospective home buyers feeling the squeeze of higher mortgage rates. However, this new, higher interest rate environment comes with a silver lining, especially for savers.
There are now higher yields available for relatively low risk investments such as money market funds and short-term Treasury Bonds that have not been available for decades. Unfortunately, many investors have not been able to take advantage of this new development.
The reason is that savings account rates have lagged behind and remain fairly low, with the Bankrate annual average for savings accounts coming in at just 0.23% on March 2nd, 2023. While this is an average, and there are savings accounts that do offer higher rates, short-term fixed income investment options are available with yields between 4.4% and 5.3%, while taking minimal risk.
Options for conservative fixed income investing:
1. Money Market Funds:
Cash substitutes that are available in most investment accounts that offer stable value and a return based on underlying investments. As this is a money market fund the principal amount does not change, but the interest rate paid will change over time with market rates. This type of holding is very liquid should you need the funds or want to invest them in something more aggressive in the future.
Example: Schwab’s Value Advantage Money Market Fund – Yield: 4.48%
2. Short-Term Treasury ETF:
A short-term treasury ETF, or Exchange Traded Fund, are Treasury bonds are backed by the U.S. Government, so they are viewed as being as close to a riskless asset as possible. With the ETF, the yield and the price of the asset will move with changes in the interest rate environment. The ETF is very liquid with two-day cash settlement.
Example: iShares Treasury Floating Rate ETF – Yield – 4.46%
3. Individual Short-Term Treasury Bonds:
With this option you would be investing in the same bonds the ETF owns but would be buying individual Treasury Bonds. Due to the inverted yield curve; 6, 9 and 12 month treasury bonds have yields to maturity of 5.255%, 5.285% and 5.342% respectively.
With individual bonds you are locking in the yield at the time of purchase, and although the bond price will fluctuate over time, you are guaranteed to get your principal back when the bond matures in addition to coupon (yield) payments. Treasury bonds are less liquid than the money market fund or ETF. They can be sold relatively quickly, but if they are sold before maturity, they are sold at the current market price. An investor is only guaranteed to get the return of principal if the bond is held to maturity.
How We Can Help
If you have cash sitting on the sidelines and are interested in learning more about these cash alternatives, contact us today.