By Jane Young, CFP, EA
The objective of most investors for the fixed income portion of their portfolio is safety and stability. Fixed income provides a hedge against stock market volatility and short-term liquidity. Over the last couple of years of high inflation and rising interest rates, the return on low risk fixed income offerings has become much more appealing.
You will still want to keep money needed within the next six months in a bank account but there are several secure options for money that is not needed in the next few months. The most secure options include Certificates of Deposit (CDs), Treasury Bills, I bonds, and Treasury Notes.
Surprisingly, CDs have become one of the safest, highest yielding, and easiest ways to invest your fixed income dollars. They can be purchased at a bank or through a brokerage account. CDs purchased through an FDIC insured institution have the backing of the federal government up to $250,000. Always purchase CDs through an FDIC insured bank and purchase a non-callable CD to be sure the bank cannot cash in the CD, before maturity. Rates will vary between banks and brokerages so shop around for the best rate. As of April 7, 2023, rates on non-callable CDs through a brokerage account were paying an average of 4.85% on maturities of six months to two years.
Treasury bills and treasury notes are another reasonable option for the fixed income portion of your portfolio. Treasuries can be purchased at auction through Treasurydirect.com or through a brokerage account. Treasury bills and notes are backed by the U.S. government and are not taxable at the state or local level. Treasury bills are short-term securities that mature in one year or less, the rate for a 52-week Treasury bill was 4.6% on April 7, 2023. Treasury notes have maturities of two, three, five, seven, and ten years. Rates on April 7, 2023 were 3.27% for two years, 3.5% for five years, and 3.39% for ten years.
I bonds, savings bonds issued and backed by the federal government, are another reasonable fixed income option. The return is comprised of a fixed rate and a variable rate that fluctuates with inflation. The variable rate changes every November and May. I bonds issued on November 1, 2022, through April 30th, 2023, are paying 6.89% including a fixed rate of .40%. The rate is expected to drop, to possibly below 5%, when it is adjusted in May. I bonds can be held for 30 years but must be held for at least one year. There is a three-month interest penalty if redeemed within five years. You are limited to the purchase of only $10,000 per year, plus $5,000 in paper bonds, with a tax refund from the IRS. I bonds must be purchased by creating an account on Treasurydirect.com, which can be a challenging website to maneuver. Interest on I bonds is not subject to state or local tax.