A Cash Alternative: Smart Fixed Income
The beginning of 2024 seemed like a great opportunity to invest in treasuries2 or CDs3 . Just earlier this year, 6–12-month treasuries were yielding about 4.75%-4.90%, and crept up above 5% for a portion of the first half of the year. Fast forward to today, we saw our first 50 basis points rate cut from the Federal Reserve and see very little talk of any stalling on additional rate cuts. It is no longer a question of “if,” but more of how much.
In the data chart noted above we can see yields are down to about 4.48% on the 6 month and 4.34% on the 1-year treasury. As we continue down the yield curve, yields bottom around 4.01% for the three-year treasury before creeping back up.
So why lock in a “lower for longer” when we can seek to position ourselves in front of the curve? With headline data showing strong GDP growth of 2.8% for Q3, and unemployment showing 4.1%, we may not need huge cuts going forward to support economic growth.
Outside of treasuries, the bond market is presenting some of the most attractive yields we’ve seen in years. Investment-grade corporate bonds are currently yielding around 5.09%5 , while high-yield bonds are oƯering about 6.95%. Securitized bonds, such as mortgage-backed securities and collateralized debt obligations (CDOs), are yielding approximately 6.5%6 . Floating rate bonds, which adjust their interest payments with changes in interest rates, are also providing competitive yields. These will likely be more volatile, but those spreads make the total return profile much more attractive. Further, any duration means that we might be able to expect these returns for longer periods of time.
1 Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk. (116-LPL) 2 Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, oƯer a fixed rate of return and fixed principal value. 3 CDs are FDIC insured to specific limits and oƯer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal. (120-LPL) 4 Resource Center, US Department of the Treasury, https://home.treasury.gov/resource-center/data-chartcenter/interest-rates/TextView?type=daily_treasury_bill_rates&field_tdr_date_value=2024 5 Moody’s Seasoned Aaa Corporate Bond Yield, YCharts, https://ycharts.com/indicators/moodys_seasoned_aaa_corporate_bond_yield 6 Bloomberg US Mortgage Backed Securities, YCharts, https://ycharts.com/indices/%5EBBUSMBSTR
The Yield Curve Dynamics
The yield curve, which plots the interest rates of bonds of diƯerent maturities, is experiencing some interesting shifts. The front end of the yield curve (short-term rates) is expected to come down as the Federal Reserve potentially lowers rates to stimulate the economy. This means that short-term bonds might see price increases, providing capital gains to investors in addition to income.
However, the longer end of the yield curve (long-term rates) is likely to remain elevated due to the term premium—the extra yield investors demand for holding longerterm securities. This premium is coming back as investors seek compensation for the risks associated with longer maturities, such as inflation and interest rate changes.
With the current yields on bonds, you can lock in higher interest payments than we’ve seen in over a decade. This is particularly beneficial if interest rates start to decline, as the value of existing bonds with higher rates will increase. Additionally, bonds’ lower volatility compared to stocks makes them a more conservative bet in uncertain economic times.
Conclusion
Moving from cash to bonds or a diversified portfolio7 can be a smart strategy in today’s market. With attractive yields and the potential for capital gains, as interest rates fluctuate, a diversified bond portfolio oƯers a compelling alternative to holding CDs or short-term treasuries looking forward.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. No strategy assures a profit or protects against loss.
