Bond Funds Turbocharge Payouts
Monthly payouts from bond funds are soaring, with more raises likely to come.
![dollar sign balloon attached to pump](https://cdn.mos.cms.futurecdn.net/L6VHweBHnCdgN8bPLXQPg7-415-80.jpg)
The typical short-term taxable bond fund has lost a hard-to-swallow 4% to 6% this year through Sept. 9. Fast-climbing interest rates exacted this heavy cost, usurping two years or more of yield. But you know that.
So here's a query: What is the typical growth rate of these funds' cash distributions since just before the Federal Reserve threw the interest rate switch in March? The answer: 94%. Monthly payouts from the 10 largest such bond funds are riding a rocket ship, nearly doubling already, with more raises to come.
American Funds Intermediate Bond Fund of America (FIFBX), a short-term fund despite its name, tops the list with a 246% boost since early March. Annualizing its latest monthly payment works out to a 4.2% yield – about where economists and fixed-income fund managers expect the Fed to drive short-term rates over the next several months before pausing to assess the effects on the economy, inflation and investor moods.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
True, a fund that pays you 4.2% but shows a year-to-date total "return" of negative 6% still does not sound enticing, especially alongside my brokerage firm's posted ladder of six- to 24-month certificates of deposit paying 3.25% to 3.50% – and I spotted that offer two weeks prior to the Fed's September rate augmentation.
What's likely to be the most rewarding way to tap into chunkier short-term interest rates once the Fed reaches its plateau? And do managers of short-term bond and bond-like mutual funds and exchange-traded funds have strategies to deliver extra yield? I asked short-term bond lifers whether better conditions are nigh.
Better Days for Bond Funds Ahead
It is no surprise to report their answer is yes.
Matt Freund, head bond strategist for Calamos Investments, says the time to stay away has come and gone. "It looks more every day like you will get paid for the risks you are taking," he says.
Translated: Even with higher bank savings rates, bonds and notes freshly issued or priced in the open market to yield 3% to 5% are much more tempting than bonds that yielded less than 2% six months ago.
I understand that super-safe CDs, Treasury bills and money market funds now pay a fair wage. But I cannot ignore the uptrend in fund distributions – and why it will continue for a while after the Fed stops raising rates.
There is always a lag in a fund's interest-generating power in a rising-rate environment because lower-coupon stuff matures gradually, and higher-coupon debt takes its place. I asked portfolio manager Ron Stahl at Columbia Threadneedle how long he would expect a fund such as Columbia Short Duration Bond ETF (SBND) or Columbia Short Term Bond Fund (NSTRX) to keep raising monthly payouts after the Fed stops hiking. He did not want to be pinned down lest anyone interpret that as a guarantee, but it could be as long as four months.
Freund notes that his firm's short funds buy floating-rate and short-term high-yield debt that will keep paying more for a decent spell whatever happens with Fed funds rates. You might not see your short-term fund redouble the monthly pay packet throughout 2023, but your income should be more than able to keep up with the Powells and the Yellens. The immediate future is brighter for this beleaguered fraternity of funds.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
June CPI Report Comes in Soft: What the Experts Are Saying About Inflation
CPI Odds rise for a September rate cut after prices fall on a monthly basis for the first time in almost two years.
By Dan Burrows Published
-
Best Closed-End Funds (CEFs) to Buy Now
The best closed-end funds will significantly boost your portfolio income and allow you to buy their underlying stocks and bonds at a discount.
By Charles Lewis Sizemore, CFA Published
-
Softer June Jobs Report Raises Rate-Cut Bets
Jobs Report Slower hiring and a rise in the unemployment rate up the odds of the Fed easing more than once before year-end, experts say.
By Dan Burrows Published
-
Fed Holds Rates Steady, Sees Just One Cut This Year: What the Experts Are Saying
Federal Reserve The Federal Reserve kept interest rates unchanged and penciled in one quarter-point cut in 2024.
By Dan Burrows Published
-
May CPI Report Comes in Soft: What the Experts Are Saying About Inflation
CPI A slowdown in inflation keeps the Fed on track for rate cuts later this year.
By Dan Burrows Published
-
When Will the Fed Cut Rates? The Experts Weigh In
Federal Reserve The timing of the first quarter-point cut to the federal funds rate remains as opaque as ever.
By Dan Burrows Published
-
May's Jobs Growth Blows Past Forecasts: What the Experts Are Saying
Jobs Report A blowout jobs report and a bit of wage inflation means a Fed pivot towards easing will have to wait.
By Dan Burrows Published
-
April CPI Report Offers Some Relief: What the Experts Are Saying About Inflation
CPI CPI moderated last month, boosting hopes for interest rate cuts coming sooner rather than later.
By Dan Burrows Published