Income-generating plays can yield up to 6% as the Fed holds rate steady

Stable Fed Rates Create Opportunities for Investors to Earn Up to 6% Yield

Think of investing like choosing where to park your bike—do you want it safe and easy to grab soon, or are you okay locking it up for a while to maybe get a bigger reward? That’s what’s happening in the markets right now, and it matters for anyone looking to grow their money.

Why Investors Care About the Fed’s Pause

The Federal Reserve just decided not to lower interest rates right now. This means the money you can earn from short-term investments, like certain bonds, is still pretty high. Investors are watching what the Fed does because it affects everything from your savings account to the stock market.

If rates stay up, you can earn more from safe places like Treasury bills or high-quality bonds. But if rates drop later, those chances could disappear.

Bullish Side: The Pros of Short-Term Bonds and Cash

  • High Yields: Short-term bonds, money market funds, and certificates of deposit (CDs) are paying more than they have in years. For example, some short-term bond funds are paying over 4%—much higher than the 1% or less a few years ago.
  • Flexibility: These investments let you keep your money accessible if you need it soon. You’re not locking it away for years.
  • Lower Risk: Safe choices like Treasury bills or money market funds aren’t likely to lose value, even if the market gets rocky. Three-month Treasury bill yields have stayed above inflation so far in 2024.
  • Popularity: According to Morningstar, over $85 billion has poured into ultra-short bond ETFs in the past year, showing people trust these options right now.

Bearish Side: The Cons and Risks

  • Missed Opportunities: If the Fed cuts rates later, the returns on these safe investments could drop fast. You might miss bigger gains in stocks or longer-term bonds.
  • Credit Risk: Some higher-yield options, like bank loan ETFs, come with more risk. They pay more because there’s a bigger chance the borrower can’t pay back.
  • Penalties: With CDs, you can’t touch your money early without a fee. If you need cash in a hurry, this could hurt.
  • Inflation: If inflation picks up, even today’s higher yields might not keep up with rising prices, shrinking your real returns.
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What Are Investors Buying?

Many are choosing short-term bond funds, which include government and corporate bonds. Favorites include:

  • Vanguard Short-Term Corporate Bond ETF (VCSH): Yields around 4.2%.
  • Vanguard Short-Term Bond ETF (BSV): Yields around 3.8%.
  • JPMorgan Ultra-Short Income ETF (JPST): Yields about 3.8% and has outperformed some peers over several years.

Some investors also like bank loan ETFs, such as:

  • T. Rowe Price Floating Rate ETF (TFLR): Yields over 6.5%.
  • Invesco Senior Loan ETF (BKLN): Yields about 6.7%.

But remember, higher yields mean more risk—these loans are lower quality than most government bonds.

Cash Assets: Simple and Safe

For those who want easy access to their money, cash assets like money market funds and CDs are still paying more than they used to. The average money market yield is about 3.5%, and some CDs offer 4% or more for locking your money for several months.

Experts say these are good for “safe money”—the cash you may need soon. But, if you take your money out of a CD early, you’ll pay a penalty.

Extra Data Point: How Today Compares to the Past

Just two years ago, money market funds paid less than 1%. Now, they’re over 3%, and that’s better than current inflation, which is about 3.3% in 2024. See the latest inflation data here.

Investor Takeaway

  • Consider short-term bond funds or money market funds if you want steady income with lower risk.
  • If you’re okay with a bit more risk and a longer time frame, bank loan ETFs could boost your returns—but know the risks.
  • For absolute safety, look at Treasury bills or CDs, but be aware of early withdrawal penalties.
  • Watch what the Fed does next—if rates drop, today’s yields might not last.
  • Don’t put all your eggs in one basket; balance some safe, short-term picks with long-term growth investments.

For the full original report, see CNBC

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