6 Best Fixed Income Investments For A Low-Rate Environment
Fixed income investments are seen as a safe haven among investors. They are typically investments with a fixed rate of return and a longer time frame in which one can expect the investment to be made back. They are an investment that is not as volatile as some other investments.
6 Best Fixed Income Investments For A Low-Rate Environment
Despite their stability, fixed income investments are not without risk. In the current low-rate environment, many investors are looking for investments that are less volatile and that offer a long-term return. This article will discuss some of the best fixed income investments for investors looking for a low-rate environment.
Fixed income investments
Fixed income investments are a type of investment in which the investor’s capital is guaranteed to be returned with interest. Fixed income investments are often referred to as bonds. Bonds are loans that are issued by corporations, governments, or other organizations. Fixed income investments are usually considered less risky than other types of investments. Fixed income investments are typically issued in the form of bonds, which are sold to a public market.
1. Online Savings Accounts
A savings account is a type of bank account that allows individuals to deposit money and earn interest on the balance. The primary purpose of a savings account is to provide a safe place to save money, while also earning a modest return in the form of interest.
Savings accounts typically offer lower interest rates compared to other investment options, but they also offer the benefit of being FDIC-insured, meaning that your deposits are insured up to $250,000 in the event that the bank fails.
Some features of a savings account include:
- Accessibility: Most savings accounts allow you to make deposits and withdrawals, although some may limit the number of monthly transactions.
- Interest: Savings accounts earn interest on the balance, with the rate varying depending on the bank and the account terms.
- Safety: Savings accounts are generally considered a safe place to store money, as they are FDIC-insured.
- Liquidity: Savings accounts offer the ability to access your funds relatively easily, although there may be restrictions on the number of withdrawals you can make in a given period.
If you’re looking to save money, a savings account can be a good option. It’s important to compare interest rates and account terms from different banks to find the best option for your needs.
2. Certificates of Deposit
A Certificate of Deposit (CD) is a type of savings account offered by banks and credit unions. CDs are similar to savings accounts in that they offer depositors a place to save money and earn interest. However, they differ from savings accounts in several key ways.
Features of a CD include:
- Fixed Term: CDs have a fixed term, typically ranging from a few months to several years, during which depositors agree to keep their money in the account.
- Fixed Interest Rate: The interest rate on a CD is fixed for the term of the account, meaning that the rate will not change regardless of changes in the market.
- Penalty for Early Withdrawal: CDs typically have a penalty for early withdrawal, meaning that if you withdraw your money before the end of the term, you may forfeit some or all of the interest earned.
- Higher Interest Rates: CDs typically offer higher interest rates compared to traditional savings accounts. This is because the bank can use the depositor’s funds for a longer period of time, allowing them to earn more from the investment.
CDs can be a good option for those who want to save money and earn a higher interest rate, and are willing to commit to keeping their funds in the account for a fixed period of time. However, it’s important to consider the early withdrawal penalty and compare interest rates from different institutions before opening a CD.
3. Corporate Bonds
Corporate bonds are debt securities issued by companies to raise capital. When an investor purchases a corporate bond, they are essentially lending money to the company, and in exchange, the company promises to repay the principal plus interest (also known as the coupon) on a set schedule.
Features of corporate bonds include:
- Fixed Interest Payments: Corporate bonds typically pay a fixed rate of interest, known as the coupon rate, over the life of the bond.
- Maturity Date: Corporate bonds have a maturity date, which is the date on which the company will repay the bond’s face value (principal) to the investor.
- Credit Rating: Corporate bonds are rated by credit rating agencies, which evaluate the creditworthiness of the issuing company and the risk of default. Higher rated bonds are generally considered to be less risky, while lower rated bonds offer the potential for higher returns.
- Market Price Fluctuations: The market price of a corporate bond can fluctuate based on changes in interest rates, creditworthiness of the issuer, and overall market conditions.
Investing in corporate bonds can provide a source of fixed income, as the investor will receive regular interest payments. However, it’s important to consider the creditworthiness of the issuer and the risk of default before investing in corporate bonds. As with any investment, it’s also important to consider your overall financial situation and investment goals before investing in corporate bonds.
4. Defined-Maturity Bond ETFs
Defined-maturity bond exchange-traded funds (ETFs) are a type of bond ETF that hold a portfolio of bonds with a set maturity date. Unlike traditional bond ETFs, which hold a mix of bonds with varying maturities, defined-maturity bond ETFs focus on bonds that will mature at a specific time.
Features of defined-maturity bond ETFs include:
- Fixed Maturity: As the name suggests, defined-maturity bond ETFs hold bonds with a set maturity date, providing a known end date for the investment.
- Predictable Income: Defined-maturity bond ETFs offer a predictable stream of income, as the ETF will receive the interest payments from the underlying bonds until they mature.
- Diversification: By holding a portfolio of bonds, defined-maturity bond ETFs provide diversification and can help to reduce the risk of default by a single issuer.
- Liquidity: Defined-maturity bond ETFs are traded on stock exchanges, providing the ability to buy and sell shares throughout the trading day.
Investing in defined-maturity bond ETFs can be a good option for those looking for a predictable source of income and a known end date for their investment. It’s important to consider the credit quality of the underlying bonds, as well as the fees and expenses associated with the ETF, before investing. As with any investment, it’s important to consider your overall financial situation and investment goals before making a decision.
High-Yield Bond ETFs
High-yield bond exchange-traded funds (ETFs) are a type of bond ETF that invest in bonds with lower credit ratings, also known as junk bonds. These bonds offer higher yields compared to investment-grade bonds but also carry a higher degree of credit risk.
Features of high-yield bond ETFs include:
- Higher Yields: High-yield bond ETFs invest in bonds with lower credit ratings, which generally offer higher yields compared to investment-grade bonds.
- Credit Risk: The bonds in a high-yield bond ETF have a higher risk of default compared to investment-grade bonds, meaning that there is a higher chance that the issuer may not be able to make interest payments or repay the bond’s face value.
- Market Price Fluctuations: The market price of a high-yield bond ETF can fluctuate based on changes in interest rates, creditworthiness of the underlying issuers, and overall market conditions.
- Diversification: By holding a portfolio of bonds, high-yield bond ETFs provide diversification and can help to reduce the risk of default by a single issuer.
Investing in high-yield bond ETFs can offer the potential for higher yields compared to investment-grade bonds. However, it’s important to consider the credit risk associated with these bonds and to carefully review the portfolio holdings of the ETF before investing. As with any investment, it’s important to consider your overall financial situation and investment goals before making a decision.
Municipal bonds, also known as munis, are debt securities issued by state and local governments and their agencies to finance various projects such as schools, roads, and bridges. When an investor purchases a municipal bond, they are essentially lending money to the government, and in exchange, the government promises to repay the principal plus interest on a set schedule.
Features of municipal bonds include:
- Tax-Exempt Interest: Municipal bonds generally offer tax-exempt interest, which means that the interest income is exempt from federal taxes and may also be exempt from state and local taxes for residents of the issuing jurisdiction.
- Credit Quality: Municipal bonds are generally considered to be lower risk compared to corporate bonds, as default rates are lower among state and local governments.
- Market Price Fluctuations: The market price of a municipal bond can fluctuate based on changes in interest rates and overall market conditions, but the impact on munis may be less than on other types of bonds.
- Maturity Dates: Municipal bonds have a maturity date, which is the date on which the government will repay the bond’s face value (principal) to the investor.
Investing in municipal bonds can provide a source of tax-free income and can be a good option for those in higher tax brackets. However, it’s important to consider the credit quality of the issuing government and the risk of default before investing in municipal bonds. As with any investment, it’s important to consider your overall financial situation and investment goals before making a decision.