A Goldilocks Environment for Bonds

When I got out of school and started working, I opened a checking account and received 4% interest – yes, in my checking account. I also opened a money market account with Waterhouse Securities (which, after being acquired numerous times, is now Schwab) and earned 4.25%.

I earned those high rates of interest for several years, and I came to expect them.

So when rates started to fall in the 2000s and banks and brokers began to pay as close to zero interest as they could, it was incredibly frustrating for me – as it was for all savers.

Today, the yield on the 10-year Treasury (a good proxy for interest rates) is a little more than half of where it was when I first ventured out into adulthood. So you’d think my Schwab account would pay somewhere around 2%, right?

Wrong!

Just as I’m still anchored to the 4% interest I received when I was young and impressionable, the banks and brokers are still intent on paying the nearly 0% interest they’ve been paying for the past 15 years or so.

My Schwab account pays me the princely sum of 0.45%. My bank pays even less. Suffice it to say, I keep very little cash in those accounts.

But that doesn’t mean there aren’t good income opportunities out there. You can earn 5% or more in some short-term Treasurys and certificates of deposit (CDs). Now, you do have to lock up your money for the full term, but it can be for very short amounts of time.

For example, you can earn 5.5% annualized on a one-month Treasury bill. And T-bills are liquid enough that you can sell them if you need to get your money out.

Of course, there’s no guarantee you’ll get all of your money back, as the bond’s price could fluctuate. But if you wait four weeks to get access to your funds, you are guaranteed to get all of your money back plus interest.

For those who are comfortable making longer-term investments in order to obtain higher yields and potential capital gains, corporate bonds are a great choice.

Right now, you can lock in a 5.4% yield on “A” rated corporate bonds for two years. These are extremely safe bonds.

If you go down to “BBB-” rated bonds, which are still investment-grade and very safe, you can earn as much as 7.4%. And if you’re willing to take on a bit more risk, you can earn more than 11% on some “BB-” rated bonds. (That’s at the high end of the range, but it is available.)

Plus, if economists and Wall Street are correct and the Fed lowers rates several times this year, bond prices will soar, because they move in the opposite direction of interest rates.

Bonds are in a sweet spot right now. If rates don’t move, bond investors will continue to receive their highest levels of interest in the past 15 years or so. And if rates fall, those higher yields will become even more valuable and bond prices will jump, offering the opportunity for even greater returns.

Life has gotten pretty expensive in the past few years. Savers and investors need every dollar working hard for them. We’re in a perfect environment for bonds to generate strong yields and potential profits.

If you don’t own any bonds, consider adding some to your portfolio today – whether they’re short-term Treasurys or higher-yielding corporates.