Key Takeaways
- Investors and economists expect the Federal Reserve will cut its influential interest rate in September.
- While high-yield savings accounts and money market funds currently offer high interest rates, that will change when rate cuts are implemented.
- Investors can lock in those rates by investing in fixed income such as longer-term bonds.
For investors who have been stashing their money in high-yield savings accounts, it may be time to reallocate those portfolios.
Investors have been able to cash in on stellar yields thanks to the Federal Reserve’s high interest rates. But inflation has eased and unemployment has ticked up, which may encourage the central bank to cut its key fed funds rate. That could make other investments more attractive.
Experts say putting your money in cash equivalents may be helpful if you need access to money within a year—say, for a housing down payment or emergencies. But cash typically doesn’t outpace inflation in the long run, and many experts expect money-market and other rates to come down. Other assets, such as longer-term Treasury bonds and corporate debt, might be better options, they say.
Longer-Term Bonds Could Start Offering Higher Yields
When the yield curve inverted in July 2022, Treasury bonds with longer durations offered lower yields than their shorter-duration counterparts. Typically, longer-dated bonds provide higher yields than short-term ones—with the higher yield viewed as a reward for tying up your money for longer.
However, now the curve is flattening, bringing the yields closer together, as investors anticipate a cut from the Federal Reserve. In the future, investors may need to opt for longer-term bonds to get a higher yield, advisors said.
Additionally, experts say, locking in a higher rate for longer reduces reinvestment risk, which can occur when you need to reinvest money from a maturing security at a lower interest rate.
Rate cuts also generally mean that bond prices will rise in the future, since bond prices and yields move inversely, so investing before the Fed cuts could mean you benefit from price appreciation.
“You’ll get attractive interest coupon payments, plus you’ll get some appreciation, which will give you a very attractive total rate of return,” said David Rosenstrock, a CFP and director of Wharton Wealth Planning.
Treasury Bill and Money Market Funds Yields May Start to Fall
Although investors have been excited about yields on money market funds and Treasury bills, financial advisors suggest that those willing to take on additional risk consider other types of fixed-income securities, like investment-grade corporate bonds.
Rating agencies like Moody’s rank bond issuers based on their creditworthiness. Typically, bonds with lower ratings offer higher yields as a reward for the extra risk. Investment-grade corporate bonds are considered the highest-rated bonds.
“Now there is some risk there, but we think the risk with investment-grade corporate bonds is relatively low,” said Collin Martin, a fixed income strategist at Schwab. “They don’t have a high likelihood of default….They have a lot of liquidity, a lot of cash on their balance sheet, and they’re seeing their profits continue to rise.”
For the S&P 500 Investment Grade Corporate Bond Index, the 1-year return was more than 6.64% on Friday. At the same time, the yield on a 1-year Treasury bill was 4.87%.
However, unlike Treasury bonds, which are exempt from state and local taxes, corporate bonds typically don’t offer tax benefits, advisors said. So you’ll want to consider whether the additional yield from corporate bonds exceeds the tax savings you’d get from investing in Treasurys.