Investors Scurrying to Find Better Yields : Investment: Interest rates on six-month CDs are down 3.5 percentage points in 26 months. Fixed-income securities such as bonds and bond funds may help.
That cacophony you’re hearing in the marketplace these days is the crashing of interest rates and the stampeding of confused investors chasing higher returns on their money.
Yields on money market funds and certificates of deposit have sunk as low as the economy.
In the last 26 months, interest rates on six-month certificates of deposit have dropped 3.5 percentage points--from 9.34% to 5.82%--while one-year rates are down from 9.51% to 6.14%, said Robert Heady, publisher of 100 Highest Yields, a Florida newsletter that tracks the rates banks pay for deposits.
The IBC-Donoghue Money Fund Average, which tracks money market funds, shows that the average rate on taxable money funds declined from 9.16% to 5.49% in the same period.
The investments are still safe and liquid--they can be sold easily--but they pay 2 percentage points less than they did a year ago.
So where should you put your money if you want a higher return?
Generally, experts say, it should go into fixed-income securities such as bonds, bond funds and mortgage-backed securities.
Short-term bond funds are doing so well that Jack Vander Vliet, chief investment officer of Dean Witter’s Intercapital Corp., said his firm had just started a short-term Treasury bond fund. “It should yield about 6% to 6.5%, it is safe and is exempt from state and local taxes,” he said. “It is for people who are unhappy with money market rates.”
Heady thinks that rates have bottomed out, but, he said, “This time there will be no quick bounce-back because the economy is weak, and we may even see a slight slip.”
If you’re looking for higher returns, expect more risk.
Frank Rachwalski, who manages money market funds for Kemper Financial Services Inc. in Chicago, said one danger of buying bonds when rates have dropped as much as they have is that interest rates will begin to rise soon, and that may mean bond prices will fall.
“Buying short-term bonds is a defensive alternative now,” he said.” Short-term investments (six months to two years) or intermediate-term (two to five years) are what most experts suggest now. Heady suggests six-month to one-year CDs--no longer, no shorter--because if rates dip, you will have to reinvest the money at lower rates.
John Markese, research director of the American Assn. of Individual Investors, suggests buying Treasury bonds, but with terms of no longer than five years. And Joel Issacson, financial planning partner at Weber, Lipshie & Co. in New York, advises “laddering” Treasury securities.
Laddering is an investing technique where you buy bonds that mature in either consecutive years or at regular intervals so that you continually have bonds coming due, with proceeds to reinvest. The risk is that when the bonds come due, interest rates for the new bonds will be lower.
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