Regardless of the uncertainty surrounding the Federal Reserve’s moves on interest rates, savers can still benefit from the current situation. The rapid rate-hikes by the Fed not only allow them to earn interest on their savings, but they also have more options to choose from.
Money-market funds are offering yields of around 5%, which is significantly higher than the average 0.5% for savings accounts, according to Bankrate data. With the Fed’s intention to raise rates by 25 basis points to a range of 5.25% to 5.5% at its upcoming meeting, this yield seems quite appealing.
Although there are speculations regarding future Fed meetings, the consensus view seems to be that rates will stay above 5% for the foreseeable future. Market predictions suggest that this trend will likely continue until at least March, according to the CME Group’s FedWatch Tool.
“Money markets pay 5% and provide excellent security. They are a great option for parking cash while making decisions,” said Tom Essaye, founder of Sevens Report Research. He also emphasizes the liquidity aspect of money markets.
However, some investors may seek investments with more diversity and less exposure to sudden rate swings. Determining the best course of action depends on one’s outlook on the economy.
Both Wall Street and economists have been oscillating between recession concerns and the belief that the Fed can engineer a soft-landing. With the S&P 500 trading at 20 times forward earnings, investors seem to be confident in the market’s resilience and expect a mild downturn, if any.
Investing in High Yield Corporate Debt
Higher Yields in High Yield Corporate Debt
For investors who hold a more bullish view on the economy, investing in high yield or corporate debt could be an attractive option. Currently, the SPDR Bloomberg High Yield Bond ETF (JNK) offers a yield of 6.4%, while the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) provides a yield of 5.6%. Both of these options offer yields slightly higher than the current money market rates. If the economy continues to perform well, investors can expect capital appreciation along with the interest income from these investments.
Consideration for a Potential Downturn
However, not everyone shares the same level of bullishness. Some, like Essaye, believe that the economy might face challenges in absorbing the impact of the recent rate hikes. In such a scenario, it might be prudent to explore other investment options with a shorter time horizon. One such option is investing in 2-year Treasuries, which may provide a safe haven during downturns. Although this investment may not offer high yields, it can potentially generate capital appreciation as investors move their funds from stocks to safer assets like Treasuries during times of market volatility.
The Fed’s Influence on Yield Curve Strategy
Recent discussions indicate that many investors are contemplating extending their yield curve strategies, considering that the Federal Reserve seems to be approaching the end of its rate-hiking cycle. After tightening by 500 basis points, it is believed that the Fed is close to completing its interest rate hikes, with only a few more expected in the near future. Senior portfolio manager Jeff Weaver suggests that due to a tight labor market and high inflation, the Fed might keep rates higher for longer. Consequently, extending the yield curve could be a sensible move. While we are reaching the end of the interest-rate hike cycle, Weaver advises that it is still wise to consider some extension in a yield curve strategy.
The Appeal of Simplicity and Prudence
Considering the uncertain direction of the economy, some investors might prefer to exercise caution and stick with money market investments. This conservative approach acknowledges that sometimes simplicity is indeed better and can offer profitability while avoiding unnecessary risks.
In summary, investing in high yield corporate debt can be a potential strategy for investors who have a bullish sentiment on the economy. However, it is essential to consider the potential challenges of credit issues and the need for capital appreciation during market downturns. The prospect of the Federal Reserve nearing the end of its rate-hiking cycle also adds to the importance of extending the yield curve strategy. Ultimately, choosing between such investment opportunities requires weighing the economic outlook and personal risk tolerance.
