Investors are navigating a landscape of prolonged higher interest rates, a scenario that presents unique opportunities for generating income through strategic portfolio management. The Federal Reserve's recent projections indicate sustained interest rates, prompting investors to seek income-generating assets.
Investors are facing the prospect of 'higher for longer' interest rates, a trend that presents an opportunity for those seeking to build up portfolio income. The Federal Reserve dialed back its expectations for 2025 rate cuts at its December meeting, projecting only two reductions this year – down from the four predicted in September. Inflation fears have also intensified, prompting Bank of America to revise its forecast to zero cuts in 2025.
Concurrently, the 10-year Treasury yield has been on a steady upward march since late 2024, briefly exceeding 4.8% on Tuesday. Bond yields and prices move inversely to one another. However, the news isn't entirely bleak for income-oriented investors. 'We're just a few days into January, but this volatility is persistent,' said Steve Laipply, global co-head of iShares Fixed Income ETFs. 'Coupon clipping on the short end of the curve, building up that income cushion over time – that's the way to orient the fixed income part of your portfolio.' The Fed's steady hand on rates – the target range for overnight fed funds is now at 4.25%-4.5% – results in solid yields for short-duration instruments like collateralized loan obligations and bank loans. It also means investors may enjoy – for at least a little while longer – the attractive income interest they're collecting from instruments like money market funds, certificates of deposit, and Treasury bills. 'If you can make a little bit of extra money here or there by being intentional when investing in short-term securities, it makes sense,' said Paul Olmsted, senior manager research analyst, fixed income, at Morningstar. 'You're getting paid well versus a number of years ago when you made nothing on the front end.' Cash shouldn't constitute the primary portion of a diversified portfolio, but for investors who want to set aside funds for a substantial upcoming purchase or who desire to earn a bit of interest on their emergency funds, a high-yield savings account or a money market fund can be beneficial. Several banks still offer annual percentage yields exceeding 4% on savings accounts, including LendingClub, Synchrony Financial, and Bread Financial. Money market funds also provide investors with liquidity and healthy yield. The Crane 100 Money Fund Index has an annualized seven-day current yield of 4.19%. 'Make sure your money is working for you,' said Catherine Valega, a certified financial planner at Green Bee Advisory. 'You have extra cash for emergency savings – it can now earn something.' In particular, she recommends keeping the equivalent of six to 12 months of expenses for emergency savings in a high-yield savings account, a money market fund, or Treasury bills. Interest income on Treasury bills, notes, and bonds is subject to federal income tax but exempt from all state and local income taxes, the Internal Revenue Service says. For investors who want to lock in rates – and can resist cashing out before maturity – CDs can still offer a good opportunity. Marcus by Goldman Sachs offers a 12-month CD with an APY of 4.25%, while Bread Financial has a CD with a similar maturity with a 4.1% APY.
INTEREST RATES PORTFOLIO INCOME INVESTMENTS FIXED INCOME SHORT-TERM SECURITIES HIGH-YIELD SAVINGS MONEY MARKET FUNDS
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