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The upside of high interest rates has been higher yields on some savings accounts, CDs and bonds. While we have grappled with higher grocery prices, we’ve at least been able to extract some rewards from the market. CDs and savings account yields were negligible when interest rates were low.
Now, with the first cut from the Federal Reserve locked in and at least one more anticipated by the end of the year, the repercussions will likely start coming for the high-yield accounts that have been delivering for investors. If a second cut comes in at 50 basis points rather than 25, yields will likely drop dramatically. “The Fed has justification to cut 100-150 basis points just on the inflation alone,” Kelsey Berro of J.P. Morgan Asset Management told Bloomberg.
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What’s an investor to do? The first step is awareness. You have time, but possibly not a lot of time. As with mortgage rates, there’s usually a lag between the Fed’s moves and what banks do. Determine how many of your accounts may be impacted by the shift.
If you have CDs, make sure you know when they are coming due. There may still be an opportunity to lock in rates on new CDs. Greg McBride, chief financial analyst for Bankrate.com, advises investors to make haste and consider a CD ladder with CDs spaced out over the next five years. “There’s no advantage to waiting. Yields have already come off the peak.”
Similarly, a bond ladder with municipal bonds may offer a yield-protecting strategy. Municipal bonds can offer both tax benefits and solid yields. “You could buy a high-yield muni bond fund now and get a little over 5% tax-free,” said Brad Bernstein, private wealth manager at UBS Private Wealth Management. One easy way to access municipal bonds is through an ETF like the iShares National Muni Bond ETF (MUB), which offers exposure to over 2,000 municipal bonds all in one place.
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This is also when REITs and high-yield dividend stocks become particularly attractive. Investors seeking safety have put consumer goods dividend stocks and equity real estate investment trusts back into many investors’ portfolios.
One thing to watch out for is yield traps. Several high-profile mortgage REITs have cut their dividends as loan distress has increased. Over the longer term, lower interest rates should help stabilize these REITs, but anyone who is looking only at the yield percentage will want to examine a company’s fundamentals before investing.
Investors are also seeking yields in private markets. Private credit funds are expanding at the institutional level, but retail investors also have opportunities. One option is the Arrived Homes Private Credit Fund, which reported an 8.1% annualized yield in August. The fund is taking advantage of a unique situation where real estate investors seek access to funds outside of traditional methods.
Although yields are falling, many people have become accustomed to having their money in safe scenarios where they can earn returns. This may mean that some are hesitant to start seeking out other opportunities. Vicki Bogan, a professor at Duke University’s Sanford School of Public Policy, told MarketWatch that she sees ambiguity aversion, which is similar to risk aversion. People cling to their cash because they don’t know what’s next. That may not be the most lucrative strategy in the long run.
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This article Yields Are Dropping, How Can Investors Keep Earning? originally appeared on Benzinga.com