Safe income for the medium term (5 - 10 years)

When I say, “Safe Income,” I mean income investments that are AAA rated (or FDIC insured). That includes U.S. Treasuries and TIPS, I-Bonds, agency (mortgage) debt and bank CDs. Cash is safe but it loses value due to inflation. A ladder of bonds which mature at intervals to provide is more likely to hold value.

The safest of the safe are I-Bonds. They are inflation adjusted. They have a 30 year maturity but can be redeemed without penalty or loss of value at any time before that. This makes them safer than CDs, which usually have a significant interest penalty if the money is taken out before maturity. Also safer than TIPS, whose value on the secondary market will drop below par if they are sold before maturity.

I would like to discuss 5 to 10 year safe income investments. (Mentioned by @MarkR in a separate thread.)

Because of the Fed’s actions and public (including foreign) demand, the 10 year Treasury yield has declined continuously since its last peak in 1984. But within this decline are peaks and valleys. Currently, the 10YT is at a relatively high yield of 3.4%. It’s not clear yet whether this is a true trend change. If inflation declines to 2.2% as the market predicts this will be a real yield of 1.2%.

The 10 year TIPS yield is currently 1.2%. It is the spread between the Treasury and TIPS yield that indicates the market’s expected 10 year inflation rate (3.4% - 1.2% = 2.2%).

The Treasury yield curve is currently strongly inverted. Money market funds are yielding 4%. Some FDIC insured bank accounts yield over 4%. A few banks have CDs yielding 4% or more but these are not 5 or 10 year CDs.

Surprisingly, secondary market mortgage bonds also have an inverted yield curve with longer maturities having lower yields. The 10 year yields around 3.5% so the market believes that mortgage rates will fall back to 3.5%.

We saw the problem with short-term accounts during the last wave of Fed rate cuts. All the yields were cut to less than 1%. Even CD rates were gradually cut to under 2%.

If the Fed cuts rates during the next recession (or the one after that) as they have done before it is safer to lock in higher rates in early 2023 while the Fed is still raising. I locked in a 5% yield on a 10 year CD in 2011 and I sure was glad to have it in the subsequent years of rate cutting.

The key questions are:

  1. What will the CPI-U do? TIPS and I-Bond yields are based on the CPI-U which has been flat for the past couple of months. If inflation will quickly decline to 2%, a fixed yield of 4% would yield more than a TIPS with a yield of 1.2%.
  1. What will the Fed do? How will this affect long-term yields? The Fed plans to raise the fed funds rate to 5% but this will not necessarily raise longer-term bond yields. Rather, the market may actually cut the longer-term yields in expectation of later recession and Fed cuts.

I just bought a call-protected 4.1% secondary market mortgage bond which will mature in 5 years. (The call-protected bonds yield less than callable.)

My bond ladder will mature several bonds in the next few months. There may be stock-buying opportunities – that’s a different subject entirely. What are the safest income investments for the medium term?



Happy TMF Birthday Cake Wendy!!! 23 years!! Congratulations!