Investors face the prospect of “longer-term higher” interest rates, which presents opportunities for those who want to increase income in their portfolios. The Federal Reserve lowered its forecast for rate cuts in 2025 at its December meeting, with only two rate cuts this year, down from the four forecast in September. Inflation concerns have also intensified recently, prompting Bank of America to revise its 2025 rate cut forecast to zero. Bond yields and prices move inversely. But for investors looking for income, the news isn’t that bad. “We’re a few days into January, but the volatility continues,” said Steve Laipply, global co-head of fixed income ETFs at iShares. “Clipping coupons on the short end of the curve and building an income cushion over time — that’s It’s how the fixed income portion of the portfolio is adjusted. “The Fed’s steady control of interest rates – the target range for overnight fed funds is currently 4.25%-4.5% – has led to solid returns on short-term instruments such as mortgage bonds and bank loans. Rate. It also means investors may be able to enjoy – at least over a longer period of time – attractive income interest from instruments such as money market funds, certificates of deposit and Treasury bills. “If you can consciously make a little extra money here or there when investing in short-term securities, that makes sense,” said Paul Olmstead, senior manager research analyst for fixed income at Morningstar Inc. “With a few years, it makes sense. Compared to before, when you had nothing to gain on the front end, your salary was high. “Cash shouldn’t make up the lion’s share of a diversified portfolio, but it’s great for those who want to set aside some money for a big upcoming purchase or want to start from scratch. For investors who want a little interest on their emergency fund, a high-yield savings account or money market fund can do the trick. Some banks still offer annual yields in excess of 4% on savings accounts, including LendingClub, Synchrony Financial and Bread Financial. Money market funds also provide investors with liquidity and healthy benefits. The Crane 100 Money Fund Index’s 7-day annualized return rate for the current period is 4.19%. “Make sure your money is working for you,” says Catherine Valega, a certified financial planner at Green Bee Advisory. “You have extra cash for emergency savings—now you can make some money.” She specifically recommends keeping six to 12 months’ worth of emergency savings in a high-yield savings account, money market funds or Treasury bills. The IRS says interest income from Treasury bills, notes and bonds is subject to federal income tax but is exempt from all state and local income taxes. For investors who want to lock in an interest rate and can resist cashing out before maturity, certificates of deposit can still provide a good opportunity. Goldman Sachs’ Marcus offers a 12-month CD with an annual interest rate of 4.25%, while Bread Financial offers a similar term CD with an annual interest rate of 4.1%. Portfolio Income In addition to short-term cash needs, investors can also diversify fixed-income assets by increasing investment in some short-term assets. These instruments (which also typically have shorter maturities) provide income, but their prices are less sensitive to interest rate fluctuations. “Longer durations will continue to become more volatile, but there are a lot of great opportunities on the short end of the curve,” iShares’ Laipply said, highlighting bank loans and collateralized loan obligations (CLOs) as some examples. Institutional investors snap up bank loans (lending institutions make loans to businesses) and generate revenue from the loans’ floating coupon rates. A CLO is a pool of floating-rate loans to businesses, consisting of tranches with their own risk characteristics. If a borrower becomes insolvent, the highest-rated tranches (AAA) will be paid first. The iShares AAA CLO Active ETF (CLOA) has a 30-day SEC yield of 5.92% and an expense ratio of 0.2%, while the Janus Henderson AAA CLO ETF (JAAA) has a 30-day SEC yield of 5.97% and an expense ratio of 0.2%. is 0.21%. Note that while these floating rate products offer attractive income, they should only be a small part of a diversified portfolio. Investors need to consider their long-term goals, risk tolerance and whether their portfolio meets these needs. Financial advisors have been advising investors to choose a mid-term maturity (approximately six years) to capture the opportunity for bond price appreciation after interest rates normalize. “You can make a case for higher short-term yields, but I would stay diversified across different asset classes,” Olmsted said.
Use these fixed-income assets to cushion your portfolio in 2025 | Real Time Headlines
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