It’s a great time to be a high-quality, passive income seeker
- U.S. Treasury yields between 3-month and 3-year maturities are offering some of the most productive yields we have seen in years. For example, the 12-month U.S. Treasury bill – secured by the full faith and credit of the United States – is currently yielding 4.7%, the most since 2001.
- The powerful reset to higher U.S. Treasury yields as a result of persistent inflation and a hawkish Fed stance has pulled yields of other high quality sectors to their highest points in more than a decade.
- A passive ladder of shorter-dated individual securities currently offers several benefits: elevated income, tax efficiencies, timing future cash flows for known liquidity needs, and the ability to make routine reinvestment decisions at each maturity date.
- Years of persistently low interest rates pushed many investors to hunt for higher yields. This included buying bonds with increasingly longer maturities, higher credit risk, or looking to riskier asset classes. However, investors can now generate valuable income without taking on significant interest rate, credit, or liquidity risks.
- In light of our weakening global economic outlook, we recommend emphasizing high quality fixed income for near-term purchases, such as U.S. government debt and investment grade municipal bonds. We expect riskier sectors and those with higher correlations to U.S. equities (high yield corporates, convertibles, leveraged loans) to face challenges in the year ahead.
- Comparable FDIC-insured CD’s or high yield savings accounts frequently offer 2-3%. A $100,000 investment in a 12-month U.S. Treasury bill offers superior liquidity and would earn roughly $1,500 more than a traditional 3% 12-month CD.
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