The Federal Reserve is widely expected to boost interest rates by another quarter percentage point Wednesday afternoon – and that’s terrific news for fixed income investors hoping to grab a little more yield. Since March 2022, the central bank has raised rates 10 times – with July’s expected hike marking the 11 th increase – to cool inflation. The Fed’s policy tightening campaign has had the upshot of pushing yields higher on a range of otherwise sleepy assets, ranging from Treasurys to certificates of deposit. Consider that during the week of March 11, 2022, the rate on the 2-year Treasury note was 1.75%, according to Refinitiv. As of Wednesday morning, it’s at 4.88%. Six-month CDs, meanwhile, had an annual percentage yield of 0.22%, and were offering 2.42% as of the week of July 21, according to LendingTree. “Not only is the Fed going to raise interest rates today, but even once they stop raising rates, they’re likely to keep them at an elevated level for some time,” said Greg McBride, chief financial analyst at Bankrate.com. “Income-oriented investors are seeing returns on cash and fixed income investments that they haven’t seen in 15 years.” Treasurys Safety pays. Investors who wish to squeeze a little more interest income from their cash holdings have opted for Treasury bills, with the 6-month bill yielding 5.5%. By buying multiple notes of different maturities, investors can “ladder” these Treasurys and reinvest the proceeds from maturing bonds into longer-dated issues. Or they can redeploy the money back into stocks. US6M US3M 1Y line U.S. 3 month and 6 month Treasury bills Don’t fall in love with the shorter end of the yield curve, though. At some point, the Fed will normalize its policy and that could leave fixed income investors with few places to find attractive yields again, as rates begin to come down. This is known as reinvestment risk, and it’s a major reason why strategists have recommended adding duration – a measure of a bond’s price sensitivity to interest rate changes – into the portfolio mix. Bonds with longer maturities also have greater duration. CDs and high-yield savings accounts Online banks seeking to attract depositors have lifted rates on certificates of deposit and high-yield savings accounts . For instance, Bread Financial is offering a 4.9% annual percentage yield on its savings account, and an APY of 5.35% for its 1-year CD. Investors should be aware that even as online institutions will readily pay more than 4% on savings account deposits, banks can adjust those yields at any time. Minimum account balance requirements, monthly maintenance fees and transfer limits may also come into play – tradeoffs to consider as you shop around. CDs have the benefit of allowing investors to lock in yields for a stated period of time, but investors who have been laddering these instruments may want to consider looking into longer maturities, depending on their objectives. “If you’re looking to set up a laddered portfolio of CDs, now is the time to lock in those multiyear maturities,” said McBride, referring to 2-year to 5-year instruments. “Wait too long, and those will be the maturities where yields start to slip first.” Consider that First Internet Bank of Indiana currently offers an APY of 4.85% on its 24-month CD, while SLM — also known as Sallie Mae — is paying a 4.65% yield on a similar CD. Money market funds Money market funds are also offering investors a safe place to keep some of their assets and pick up some yield. The Crane 100 Money Fund Index has a 4.96% annualized 7-day current yield as of July 25. As you examine your options, be cognizant of the underlying assets within your money market fund: Some funds stock up on Treasurys, others snap up short-term corporate paper, which may have some credit risk in exchange for higher yield. You should also keep an eye out for fees, which will crimp your returns. As sweet as rates on cash are now, investors should avoid throwing all of their funds into any one of these income-paying investments. A 5% yield is not too good to be true – but it is too good to last, and cash won’t keep up with inflation in the long term. – CNBC’s Nick Wells contributed reporting.
