Lock in Today’s High Yields Before They Go Away

Income Investing

The inverted yield curve has investors and savers focused on short-term investments like money market funds because of their high yields. However, when the Fed starts to lower interest rates, the yields on money market funds will also decline.

That’s why you need to act now to lock in today’s high yields. Let me show you how…

Man climbing stacks of coins in concrete room

Currently, interest rates show an inverted yield curve. That means short-term rates are higher than long-term rates. With a normal yield curve, longer-term rates will be higher than short-term rates. We get an inverted yield curve because the Federal Reserve controls short-term rates by setting the fed funds rate. Long-term rates are determined by the trading markets, primarily during government debt auctions.

The Fed uses its control of short-term rates to control the inflation rate. Longer-term rates are the market’s prediction of where interest rates will be in the future. When the yield curve inverts, investors can expect interest rates will eventually turn lower.

The chart below shows that short-term rates are above 5.5%, and that out at ten years, the Treasury note yields 4.3%.

It’s easy to see why investors are piling money into money market mutual funds to earn the current 5.5% yields. However, those high yields may not last, and prudent portfolio management guides you towards owning some long-term investments, so you want to lock in today’s rates to continue to earn attractive yields, even if interest rates fall over the next couple of years.

I recommend using the Invesco BulletShares ETFs for bond investing to set up a “bond ladder” of these funds. The ladder approach lets you lock in long-term rates and have money maturing each year that you can invest at current rates.

The Invesco website has a bond ladder tool that lets you select which funds you want to own, and shows you the expected returns. Each BulletShares ETF owns a portfolio of bonds maturing in the specified year. By December of each year, all of a fund’s bonds have matured, and the shares are redeemed for cash. Here is a five-year ladder using the investment grade corporate bond ETFs. Also available are high-yield and municipal bond BulletShares ETFs.

Yield-to-maturity shows you the annual returns you will earn if you buy the ETFs today and hold the shares until redeemed. The ladder has a very attractive 5.63% yield to maturity. Consider it locking in current money market rates for up to five years.

BulletShares investments pay monthly dividends, and automatic reinvestment will increase your realized returns.

I share investment ideas and strategies like this with my Dividend Hunter newsletter subscribers.

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