ot: park money for interest income

2 yr bonds, income ETF’s, other?

Maybe consider CDs.

bankrate.com/banking/cds/cd-rates/

1 Like

One view:

Never reach for yield.

Depending on the likely trajectory of inflation, essentially everything in the fixed income spectrum still has no positive real yield expectation.

If you really want a coupon (and think carefully about why you want that),
Pick 8 or 10 companies with decent dividends that you’re sure will have higher earnings in a few years.
Emphasis on “sure will be higher”, not on “decent dividends”.

You could even pick some things that are very much out of fashion.
Intel is paying 5%. They aren’t going away and have a formidable balance sheet.
How bad could it be?

I’m retired. I own stocks and sell small amounts periodically to fund my lifestyle.
Sometimes the market price is not that great, but on average it’s average.
And I try to avoid selling at those specific times, to the extent I can, trying to make my average sale price above average.

Imagine buying a block of GOOGL today at $101.75.
Each quarter, sell a dollar value equal to 0.5% of the (inflation adjusted) purchase price of the block,
and also sell another 0.5% of the current number of shares you own.
That should give you a cash yield in the vicinity of “4% and probably rising in real terms”.
The question: would you ever run out of money? Would your real yield ever fall other than small transient squiggles?
I sure wouldn’t try that with SPY starting at these prices, but judicious security selection can make for interesting strategies.
Makes a whole lot more sense than buying most fixed income offers at current prices.

Jim

23 Likes

The Federal Reserve has stated that it will raise interest rates until inflation is brought under control (2% for at least 2 - 3 months in a row). The market is predicting a fed funds rate of 3.5% (maybe as high as 4.25%) by 1Q2023. Bond values fall when interest rates rise, but a bond held to maturity will always return par.

The Fed has also stated its intention to maintain a “neutral” fed funds rate (which neither stimulates nor slows the economy) for the long term. This is quite different from the past 20 years of radical cuts to zero but it is the same as the historic (pre-2000) practice when the Fed held the fed funds rate about 2% over the inflation rate. I doubt the Fed will do that, but we’ll see.

https://fred.stlouisfed.org/series/FEDFUNDS

Definitely do not buy an income ETF or bond mutual fund. The Net Asset Value (NAV) will drop as interest rates rise. Unlike individual bonds, an ETF does not have a maturity date when your principal would be returned. If yields rise, the ETf NAV will fall about 1% for every 1% rise in the prevailing interest rate MULITPLIED by the duration of the fund. Now is a bad time to invest.

All the regular Treasury yields are still below the inflation rate. But individual Treasuries are better than nothing. There is no risk of principal loss if you buy a ladder of Treasuries and hold to maturity.

www.treasurydirect.gov

https://stockcharts.com/freecharts/yieldcurve.php

For immediate safe income, several banks are raising their deposit rates. www.bankrate.com

Cash equivalents: Vanguard money market fund which yields about 2%.

For income that keeps up with inflation, consider I-bonds. These never lose principal, regardless of what interest rates do. They always return par at redemption, and must be held a year or more. Maximum $10,000 per year.
https://www.treasurydirect.gov/indiv/research/indepth/ibonds…

Treasury Inflation Protected Securities (TIPS) currently yield 1% above the inflation rate.
https://fred.stlouisfed.org/series/DFII10

The yield curve is flat. TIPS at various maturities are available on the secondary market. The 5-year TIPS auction is 10/20/22 and the 10-year TIPS auction is 9/22/2022. You can place an order with Treasury Direct or your brokerage before the auction or buy after the auction.

https://www.treasurydirect.gov/instit/instit.htm?upcoming

TIPS that are sold on the secondary market before maturity will lose principal value if interest rates rise, but not if you hold to maturity.

The bond market currently predicts a long-term inflation rate of 2.27%. If inflation will be higher than that, TIPS will yield more than Treasuries of the same maturity.

https://fred.stlouisfed.org/series/T5YIFR

Your question was about fixed income. Dividends from stocks are NOT the same as interest from fixed income securities.

Wendy

10 Likes

6 month t-bills just shy 3.8%
I needed to park some money from selling my old house while renting & looking for a new house (different part of the country).
It will lose to inflation and will lose a bit if have to sell early on secondary market after a rate increase, but I absolutely need the principal back on a relatively short time scale, so T-bills seem the least bad of options.

1 Like

6 month t-bills just shy 3.8%
I needed to park some money from selling my old house while renting & looking for a new house (different part of the country).

For that kind of application, that sounds like a good choice.
You really want the money back at some time in the near future, and you’re certain about it.

Plus, they are almost perfectly liquid and at that short a duration it’s almost impossible to lose money in nominal terms.
So if you need it even sooner, it’s not a problem.

Jim

1 Like

Definitely do not buy an income ETF or bond mutual fund. The Net Asset Value (NAV) will drop as interest rates rise.

Wendy or others,

What about the idea of buying an inverse bond ETF?

1 Like

What about the idea of buying an inverse bond ETF?

To clarify a bit, I ask the above not for the purpose of generating interest income, but for the purpose of finding something that might appreciate in value during a time of rising interest rates…

1 Like

6 month t-bills just shy 3.8%
-----------------------------------------------------------------------------------------------best place to buy it?

2 Likes

To answer a question: here’s a link to how to buy treasury bonds and bills:
https://www.investopedia.com/articles/bonds/08/treasuries-fe…

2 Likes

<Wendy or others,

What about the idea of buying an inverse bond ETF? >

I did that once and was burned when interest rates unexpectedly dropped for a short time.

Run a spreadsheet. The losses from an inverse bond ETF if yields drop temporarily are hard to make up even if yields begin to rise again. Not to mention the expenses of the fund in a low-interest rate environment.

I am staying away from inverse bond funds because they are speculative and risky even though interest rates are expected to rise. YMMV since I’m a low-risk investor. Many other investors don’t mind speculation.

Wendy

5 Likes

What about the idea of buying an inverse bond ETF?

TBT, a -2x short fund on 20-year Treasuries, is up 67% so far this year.
www.marketwatch.com/investing/fund/tbt
That said, you have to know when to hold 'em and when to fold 'em.

DB2

4 Likes

That said, you have to know when to hold 'em and when to fold 'em.

DB2,

Any pointers on how to know when to do which? :-))

5 Likes

6 month t-bills just shy 3.8%
-----------------------------------------------------------------------------------------------best place to buy it?

The one year is 4.08% now.
Looks like a reasonably good pick, for the purpose mentioned.
Not likely to have a positive real return, but it’s likely only a very small loss and infinitely liquid if you need the money.

As for how to buy 'em, generally you can just phone your broker and place an order.
(even if it’s a mostly electronic-only broker like IB)

As an update on another item mentioned from time to time, WFC/PL is paying 6.33%. $75/year fixed coupon, likely decade or two before it can be called.
As with many preferreds, it’s tricky these days.
Not great for a long hold because the capital value erodes with inflation, and not great for a short hold because the price might be low when you go to sell.
Sometimes it has use in the middle ground, but with inflation so unpredictable it’s hard to recommend it.
While inflation was low and T-bills were negative, it was a fine pick. No longer.

Jim

4 Likes

Has anyone taken a look at $BAMI $BAMH, preferred shares from Brookfield. Yielding nearly 7% at the moment. Much more volatile than 1 year bonds and could go much lower. However, looks interesting as an income idea.

1 Like

The one year is 4.08% now.
Looks like a reasonably good pick, for the purpose mentioned.
Not likely to have a positive real return, but it’s likely only a very small loss and infinitely liquid if you need the money.

If you sell it early do you get the interest or is there a penalty>
Why is one year better than 6 month 3.8% now?

1 Like

How does the 1 yr treasury compare with an annuity at this times besides the liquidity main difference?