6 Best Fixed Income Investments For A Low-Rate Environment

Fixed-income investors have difficulties in this context of historically low interest rates, particularly those who are approaching or have reached retirement. There is no magic bullet, but there are a number of approaches you should think about as you negotiate these treacherous waters.

Adjust Your Expectations

Setting realistic expectations is the first step in fixed-income investing at a period of historically low interest rates. It is absurd to anticipate 5 percent from a low-risk investment given that 30-year Treasury rates are below 1.5 percent and shorter-duration yields are substantially below 1 percent. As we’ll see below, there are some fixed-income investments that offer larger rates but also carry more risk.

Sometimes it makes sense to take on extra risk. However, it’s critical to comprehend these risks and how they could impact your total portfolio and financial objectives. This can entail a little bit more credit risk acceptance for fixed income investors. Over the medium run, inflation risks might increase as a result of the Fed’s current open support for higher prices.

After adjusting our assumptions, let’s examine six of the greatest fixed-income investment options that investors seeking to increase returns should take into account.

Best Fixed Income Investments for a Low-Rate Environment

1. Online Savings Accounts

A 1-month Treasury note now yields less than 0.10 percent, which is also around the average annual percentage yield (APY) standard banks give for savings accounts. However, online banks continue to provide rates that are far higher. The APYs for online savings accounts are still historically low, but they provide a secure means to safely increase the income on a demand deposit account.

The current top APYs for internet savings accounts are between 0.50 percent and 0.80 percent. Remember that real rates — those calculated after taking inflation into account — are negative. However, compared to most money market accounts or short-term government bonds, online banks do provide far greater rates.

2. Certificates of Deposit

Some certificates of deposit (CDs) could have rates that are only a little bit higher than savings accounts. Additionally, they enable you to fix the rate for the duration of the CD. That might be a drawback if rates start to rise once more, but because rates are more expected to continue falling this year, locking in rates on at least a portion of your fixed-income portfolio is a wise decision.

On a one-year CD, you may still obtain rates as high as 0.85%. Remember that rates can and often do fluctuate every day.

An excellent approach for investors to benefit from even greater rates on longer-term CDs while maintaining frequent access to the cash stored in certificates as they mature is through the use of CD ladders.

Additionally, you may find CDs with special characteristics, such as no-penalty CDs, which do not impose a fee if you withdraw your funds before to maturity. Bump-up CDs provide investors the option to raise the CD rate at any time throughout the term if market rates rise. You might be able to increase the rate twice throughout the certificate’s duration, depending on the length. Just remember that these features often have a little-lower APY.

3. Corporate Bonds

Corporate debt with investment-grade ratings is one choice if you’re trying to purchase bonds with greater returns. Companies with strong cash flow and balance sheets are issuing these bonds. Investment-grade bonds are nevertheless viewed as having a reasonable level of default protection, despite having a larger default risk than Treasuries.

A 10-year Treasury now has a yield of around 0.70 percent. A 10-year investment-grade corporate bond’s yield, in comparison, is little under 2.00 percent.

Corporate bonds can experience a loss if interest rates rise, just like Treasury bonds might. Fund managers continuously buy and sell bonds in order to preserve the average maturity of a fund over time. In a rising rate environment, selling bonds essentially locks in losses. Because of this, some investors like making direct investments in bonds that they can keep until maturity. This increases investor control over the investment, but it may also be costly and time-consuming.

4. Defined-Maturity Bond ETFs

An exchange traded fund (ETF) with defined-maturity bonds combines the control of individual bonds with the simplicity of bond funds. These ETFs invest in tens of thousands of bonds in a single fund, similar to a bond fund. Defined-maturity bond ETFs have a defined maturity after which the fund shuts and owners receive their net assets back.

The Invesco BulletShares defined-maturity bond ETF may be the most well-known. BulletShares ETFs provide investors the ability to participate in corporate, high-yield corporate, developing market, and municipal bonds. The maturities of these bonds range from one to 10 years.

The kind of bond and maturity affect the yields. For instance, the current yield on the BulletShares 2025 Corporate Bond ETF (BSCP) is 2.21 percent, while the yield on the equivalent that matures at the end of 2022 (BSCM) is 2.02 percent. You may use these BulletShares ETFs to ladder, just like CD ladders.

5. High-Yield Bond ETFs

Additionally, Invesco provides high-yield corporate bond funds with even greater yields. For instance, the corporate bond fund with the same time to maturity earns around 3% less than the Invesco BulletShares 2025 High Yield Corporate Bond ETF (BSJP), which presently yields about 5%.

It’s crucial to remember that high-yield corporate bonds have a substantially higher chance of default in this situation. Higher yields are received in exchange by investors. A risk assessment should be done before “reaching for yield.”

6. Municipal Bonds

Investors may receive better returns and tax benefits from municipal bonds. Federal taxes on muni income are often excluded, and state taxes may not apply as well. Rates on munis are hence often lower than those on other comparable bonds.

On an after-tax basis, munis may present a tempting investment for investors in higher tax rates. In addition, taxable funds should be used to hold munis rather than tax-advantaged retirement accounts.

Final Thoughts

It’s critical to keep your investing objectives in mind when you review your fixed-income strategy. For example, why are you adding bonds to your portfolio? Diversification is a factor, in addition to generating a consistent flow of revenue.

Bonds are frequently used in investment strategies to reduce portfolio volatility. Due to this, many investors choose to concentrate on corporate and Treasury bonds with an investment-grade rating. If you choose high-yield or debt from developing markets in an attempt to raise yield, be aware that volatility may rise and that investing a disproportionate amount of your fixed-income portfolio in these riskier securities may negate the initial benefit you sought.