5 Fixed-Income Investments to Take Advantage of High Rates: As the Federal Reserve has raised interest rates to cool the economy over the past decade or so, fixed-income investments have become a less seductive investment vehicle for some.
Daniel Bergstresser, associate professor of finance at Brandeis International Business School, points out that the” quantum of diversification from fixed-income investments seems to vary over time. During the 1960s and 1970s,
The takeaway for investors is that fixed-income investments are still a great way to take advantage of a high- interest- rate terrain, indeed if they do not give as important portfolio diversification at the moment. Eventually, each investor’s situation is unique, and different fixed-income investments may be more or less suitable for different people.
Then is a look at some fixed-income options for investors looking for stable income
| INVESTMENT | RISK | RETURN | LIQUIDITY |
| Certificates of deposit | Low | Low-medium | Low |
| Money market funds | Low | Low | High |
| Bond ETFs/mutual funds | Variable | Variable | Variable |
| Short-term bonds | Low-medium | Low-medium | Medium |
| Corporate bonds | Medium | Medium | Low-medium |
| High-yield bonds | Medium-high | Medium-high | Low-medium |
| Municipal bonds | Medium | Medium | Low-medium |
| I bonds | Low | Variable | Low |
| Treasurys | Low | Variable | Variable |
| Preferred stock | Medium | Medium | Medium |
| TIPS | Low | Variable | Medium-high |
| FRNs | Low | Low-variable | Medium |
What Is Fixed Income?
Fixed income:- investments generally pay a fixed interest rate or dividend until maturity. Some terms related to fixed-income investments can be confusing. Fixed-Income Investments
Here are some basic terms you should know:Price: The current value of the investment. Bond prices are inversely related to bond yields. Fixed-Income InvestmentsFixed-Income Investments
Maturity Date: The date on which the investment matures and, for some investments, the principal is returned.Fixed-Income InvestmentsFixed-Income InvestmentsFixed-Income Investments
Coupon:- A fixed interest rate that you receive.
Yield:- Not to be confused with a coupon payment. Profit is the total return on the fixed-income investment you receive. It essentially covers both the impact of the coupon payment and any change in the par value of the bond itself.
Ever feel like the interest rates on your savings accounts are laughably low? You’re not alone. With rates barely keeping up with inflation these days, your money isn’t working as hard for you as it could be. The good news is there are ways to earn higher interest rates and put your money to work. Here are 5 fixed-income investments you can tap into to take advantage of higher rates and earn more on your cash. Whether you want to boost your savings.
Certificates of Deposit: Safety and High Returns
Certificates of Deposit (CDs) are as safe as savings accounts but often offer higher interest rates. To take advantage of these stable, short-term investments:
- Shop around at different banks and credit unions. Interest rates can vary significantly, so compare rates and terms to find the best deal. Even small rate differences can add up to hundreds of dollars over the CD’s term.
- Consider CDs with longer terms, like 3-5 years. Longer terms typically mean higher rates. If you don’t need the money right away, lock in high rates now.
- Look for CDs with competitive rates and low or no early withdrawal penalties. That way you have flexibility in case rates go up a lot in the future.
- See if your bank offers promotions or bonuses for opening a CD. Some banks offer cash back or rate bonuses, especially for new customers.
- Ask about CD ladders. This strategy invests your money in multiple CDs with different maturity terms. It allows you to take advantage of higher rates now while still having access to some of your cash each year.
Money Market Funds
Money market funds are a solid choice if you’re looking for higher returns with low risk. These funds invest in safe, short-term investments like Treasury bills, certificates of deposit, and short-term bonds.
- You’ll earn higher interest than a standard savings account. Rates vary but often 1-2% annually, sometimes more.
- Your money remains easily accessible since the funds invest in short-term instruments. Withdrawals usually take 1-2 business days.
- Risk is very low. These funds invest in the safest options, and your principal investment is unlikely to decrease in value.
- Minimum deposits are often low, sometimes only $1,000 to get started.
Money market funds provide stability and income without locking up your money long-term. For short-term savings goals or emergency funds, they’re a smart choice over a basic savings account. Your money can work a bit harder for you, all while remaining within easy reach if you need it.
Bond ETFs and Mutual Funds
Exchange-traded funds (ETFs) and mutual funds that invest in bonds are a simple way to earn higher interest rates without locking in your money for a long time. These funds invest in a basket of bonds and other fixed-income securities, so you get instant diversification and professional management.
Many bond ETFs and mutual funds focus on investment-grade corporate bonds, mortgage-backed securities, or Treasury bonds. You can choose funds that target short-term, intermediate-term or long-term maturities depending on your needs. Short-term funds are less sensitive to interest rate changes but typically offer lower yields, while long-term funds often have higher yields but are riskier if rates rise.
Some popular bond ETF and mutual fund options include:
- iShares Core U.S. Aggregate Bond ETF (AGG)
- Vanguard Total Bond Market ETF (BND)
- PIMCO Income Fund (PIMIX)
- Dodge & Cox Income Fund (DODIX)
With interest rates on the rise, bond funds are an attractive option for investors seeking income and portfolio diversification. You can invest in these funds through a brokerage account, IRA or 401(k) to take advantage of their tax benefits as well. Shop around at different brokers to compare fees and fund offerings to find the right choice for your needs.
Corporate Bonds
Corporate bonds are issued by companies to raise money from investors. They generally offer higher interest rates than government bonds to compensate for the risk of default. If the company goes bankrupt, corporate bondholders may lose some or all of their principal. However, the higher yields can be attractive.
High-Quality Bonds
Bonds from large, stable companies with solid credit ratings typically offer the best combination of yield and safety. They’re unlikely to default, so the risk to your principal is minimal. Blue chip companies like Johnson & Johnson,
Junk Bonds
Bonds from companies with lower credit quality (“junk bonds”) do come with substantially higher risks, but also much higher interest rates, often over 5-10% annually. If the company avoids bankruptcy, the rewards can be substantial.
Duration Risk
The longer a bond’s duration, the more its price will drop when interest rates rise. Long-term corporate bonds with 15-30 year maturities offer the highest yields but also the greatest interest rate risk. If rates move up sharply, the bond could fall significantly in value.
U.S. Treasurys
U.S. Treasurys
U.S. Treasury securities, like Treasury bills, bonds, and notes, are considered very low-risk investments backed by the full faith and credit of the U.S. government. When interest rates rise, the yields on newly issued Treasurys also go up. This means you can take advantage of higher rates by investing in short-term Treasurys.
- Treasury bills (T-bills) mature in less than a year. You can find 1-month, 3-month, 6-month, and 1-year T-bills with interest rates higher than most CDs and savings accounts.
- Treasury notes (T-notes) mature in 2 to 10 years. If interest rates rise, the yields on new T-notes will be higher than older notes, so you can invest in new notes to lock in the higher rate.
- Treasury bonds (T-bonds) mature in 10 to 30 years. Like T-notes, the yields on newly issued T-bonds will reflect higher overall interest rates. T-bonds pay interest semiannually and the principal amount when they mature.
Conclusion
So there you have it, 5 ways to take advantage of rising interest rates and earn solid returns in the fixed-income market. Whether you prefer the safety of CDs and treasury securities or want to venture into riskier areas like high-yield bonds and REITs, you now have some attractive options to consider. The key is to do your research, understand the risks, and find the right balance between risk and reward for your own financial situation. Interest rates won’t stay.
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