Advertisement
investing

Better Rates for Savers, Finally

Ultra-short-term bond funds yield more than cash, and their prices are unlikely to fall much as interest rates increase.

Goose eggs begone. Whether you save at the bank or park substantial sums in a money market fund at your brokerage between transactions, you no longer have to settle for zero interest. Today, an FDIC-insured savings account at an online bank pays as much as 1.25%. That’s the base rate for earning a risk-free return. To bend a phrase, cash now pays enough to say that all your dollars matter. Moreover, the “opportunity cost,” or forgone income, for settling for next to nothing in a checking account or brokerage cash drawer is rising.

The spark for the recent rise in yields is the Federal Reserve’s decision to move away from an extraordinarily easy monetary policy and steadily raise the federal funds rate, a key short-term benchmark. Some yields, such as those for one-year and two-year Treasury notes, have already more than doubled since last summer. As a result, many banks that had been stubbornly clinging to near-0% rates have become more willing to compete with the Treasury and money market fund sponsors.

Advertisement - Article continues below

Stay the course. None of this is to suggest that I’m bearish on stocks or longer-term debt. The Fed’s plan to bump up overnight rates twice more this year and three times in 2018 is barely registering on long-term interest rates, which are set by investors in the bond market and continue to swing within a narrow range. The market values of my favorite types of bonds, which include triple-B-rated corporate debt, tax-exempt revenue bonds and taxable Build America municipals, remain firm.

Advertisement
Advertisement - Article continues below

Dividend yields, averaging 2.0% for Standard & Poor’s 500-stock index, are still high enough to attract new money to stocks. So high-yielding shares are keepers, too.

Now, back to your cash. Besides online bank accounts, the following are safe and liquid repositories. I suggest funds for convenience, but individual bonds maturing in two years or so offer good value. Even if rates rise and prices dip a hair, you’ll get back face value at maturity. Then you can roll the proceeds into higher-paying bonds.

Advertisement - Article continues below

Tax-free money market funds. Local governments borrow from banks or sell the equivalent of Treasury bills to meet their short-term needs, and the Fed influences these rates. Such ace funds as Northern Municipal Money Market (symbol NOMXX) and Vanguard Municipal Money Market (VMSXX) have gone from paying nothing last year to paying about 0.64% today. And their monthly distributions are rising. If you are in the top, 43.4% federal tax bracket, a tax-free 0.75% is equivalent to 1.3% from a taxable fund. (Yields are as of March 31.)

Ultra-short-term bond funds. These funds’ holdings typically have average maturities of about one year, making them nearly impervious to rising rates. USAA Ultra Short-Term (UUSTX, yield 1.3%) tends to yield more than its peers, but the monthly income for all funds in this category should grow as they replace holdings with higher-yielding debt.

Short-term corporate bonds. With slightly longer maturities than ultra-short-term products, these funds carry a bit more interest-rate risk but also yield more. You need not look beyond Kiplinger 25 member Vanguard Short-Term Investment-Grade (VFSTX, 2.0%), whose holdings have an average maturity of 3.3 years.

Floating-rate bank-loan funds. I wrote about these funds in the December 2016 issue, and they’re also featured prominently in 29 Ways to Earn 1% - 10% on Your Money in 2017. My favorite is still Fidelity Floating Rate High Income (FFRHX, 3.0%). The bank loans it holds usually have below-investment-grade ratings, so you can’t precisely call such a fund a cash instrument. But the fund carries almost no rate risk, and you can sell it as easily as you can any other mutual fund.

Advertisement

Most Popular

HSAs Get Even Better
Financial Planning

HSAs Get Even Better

Workers have more options with flexible spending accounts, too.
July 2, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020

Recommended

3 Municipal Bond Funds for Rich, Tax-Friendly Yields
Investing for Income

3 Municipal Bond Funds for Rich, Tax-Friendly Yields

Municipal bond funds allow you to enjoy the benefits of tax-exempt income. By investing CEFs, you can sweeten the pot even further.
July 2, 2020
Is the Stock Market Closed for the Fourth of July?
Markets

Is the Stock Market Closed for the Fourth of July?

Independence Day falls on a Saturday in 2020. As a result, the bond and stock markets are closed for a long holiday weekend. Here's a look at the mark…
July 2, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
Resources for alternative forms of transportation needed by many older adults
retirement

Resources for alternative forms of transportation needed by many older adults

For many older adults, having an alternative mode of transportation may be the difference between independence and social isolation.
June 29, 2020