Many people have been content to keep their conservative dollars in money market funds or high-yield savings accounts in recent years. These have been earning roughly 4% annualized with very little risk. The problem is that money market yields fluctuate with Fed policy. Individual bonds, meanwhile, will continue paying a fixed interest rate until their maturity dates. In a rising rate environment, money market funds work well. If rates, however, are destined to decrease, then bonds are the better investment.
It’s important to note that buying and holding individual bonds until maturity (our preference) minimizes interest-rate risk. You don’t get the same level of certainty from bond funds, which can be worth more or less than you paid for them, depending on whether rates rise or fall.
Some have suggested long-term bond yields could continue rising based upon the $37 trillion of U.S. federal debt. Credit rating agency Moody‘s recently downgraded U.S. government debt by one notch, which does drive yields higher. This is another reason to favor individual bonds rather than bond funds. If yields continue climbing, you can reinvest maturing bonds at higher yields.
The time is right to give bonds stronger consideration, especially if your taxable income is high, and you can reap the benefits of municipals. Better yields, higher-than-normal equity volatility and expected Fed cuts all make bonds as attractive as they have looked in decades.
Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at [email protected]. Brett Angel is a senior wealth adviser at the firm.
