Fed rate hike generates 5% yield on safe-haven bonds
While Federal ReserveThe rate hike sent stock prices reeling, sending bond yields soaring.
And that has made bonds attractive to those of us looking to bolster the fixed-income portion of our portfolios. If you buy individual, safe-haven bonds and hold them until maturity, you will almost certainly receive the bond’s face value at maturity. And you can enjoy a yield close to or more than 5%.
Most investment experts recommend holding at least some bonds in your portfolio as a safeguard against falling stock prices. The standard portfolio weighting is 60% stocks and 40% bonds.
Young people can often safely spend more than 60% of their portfolios on stocks, as they have time to deal with a drop in the stock market. Older adults may want to consider a bond weight of more than 40%, so they don’t get burned by the drop in stocks after retirement.
Security of the Treasury
When it comes to choosing which bonds to buy, Treasuries are the safest. They are fully backed by the federal government, which means they are very unlikely to default.
Yields on shorter maturities are higher than current longer maturities (an yield curve inverted). That’s because the Fed’s rate hikes are pushing up short-term yields, while fearing Depression is pushing down long-term yields.
As of November 4, the one-year Treasury note has a yield of 4.8%. Of course, when that bond matures, you may want to reinvest the money in another bond. At that point, we could be in a recession, which could mean lower yields for you.
So you can buy a Three-Year Bond with a yield of 4.6%, in case the yield is lower when your bond matures.
You can get higher returns on some maturities by purchasing brokered certificates of deposit. On Fidelity Investments’ fixed-income platform, you can buy a three-year Ally Bank CD with a 5.1% return and a five-year CD Capital One with a 5% return.
These CDs are FDIC insured for up to $250,000.
Corporate bonds
Many investment-grade corporate bonds offer higher returns than Treasuries. You can buy A, one-year bond issued by the Royal Bank of Canada (RBC), a conservative bank, which has a yield of 5.33%. The 3-year RBC bond has a yield of 5.42% and the 5-year bond has a yield of 5.69%.
The single A rating comes from S&P Global Ratings.
If you’re willing to take the risk with a three-B bond, the lowest investment rating, you can often get a higher yield.
One-year bonds issued by Oracle, the tech giant, yield 5.06% (lower-rated bonds do not always yield higher yields than higher-rated bonds) than). The three-year Oracle bond has a yield of 5.51% and the five-year bond has a yield of 5.83%.
So there are plenty of ways to take advantage of rising interest rates.
The author owns Royal Bank of Canada bonds and Oracle bonds purchased through Fidelity Investments.