Fixed Income is Having a Moment
Fixed income typically doesn’t get the attention of investors. It takes a back seat to equities as the bond market has traditionally been a low volatility, slow moving market. However, the narrative has changed. The decade long era of zero, and even negative interest rate policies across the globe, has come to an end. In the U.S., shorter-term Treasury yields have increased and savers are finally being rewarded with high-quality yield out of short-term bonds that are at the highest in over a decade.
To understand why short-term high-quality bond yields are elevated, look no further than the effective Fed Funds Rate. This rate is the Federal Reserve Bank’s (the Fed) primary tool to adjust monetary policy. In the last 12 months, soaring inflation has caused the Fed to raise this rate by 4.5%, the highest level since 2007 and at the quickest pace of rate hikes since the 80’s.
Short-term, high-quality interest rates in the open market tend to track the Fed Funds rate and have risen alongside it. The same cannot be said for bank savings rates. Even as the Fed has increased the benchmark Fed Funds Rate, savings accounts have failed to follow this trend and remain extremely low relative to market yields. According to Bankrate’s Feb 1, 2023 weekly survey of institutions, the national average yield for savings accounts is .23 percent APY. With inflation still elevated, the cost of holding low yielding cash has increased as inflation erodes purchasing power; resulting in a negative real return.
For savers and investors with large cash positions sitting in savings accounts or lower yielding money market accounts, the current environment is providing an opportunity to finally put your money to work for you. Short-term high quality Treasury securities or CD’s come with the full faith and credit of the U.S. Government and provide yields between 4.5% – 5%. Moving money out of low yielding bank savings accounts into high quality short-term bonds has been a good trade and one that will likely continue throughout 2023.
To learn more, contact your financial team at Trust Point.