Layoffs are rising. Inflation is surging. The S&P 500 is sputtering. And the bond market is signaling a recession is on the way. How can investors score easy money when the economy looks so cloudy?
If there's a silver lining to making money in today's economy, it's that interest rates are soaring. The yield on the "risk-free" 10-year Treasury is now close to 4%. That presents a number of promising ways to pull in income even without taking much risk.
"Economic data plots from the last few years look like electrocardiographs," said Jack Ablin of Cresset Capital Management. "It may take another year or two, once the Covid fog lifts, for growth and interest rates to settle back toward their longer-term trend."
Jumping Into Treasuries
When you're seeing a near 4% yield on 10-year Treasuries, it's worth taking a look. It's possible to buy government bonds directly from the Treasury Department's TreasuryDirect website.
You choose the maturity of the Treasuries you want. Don't overlook bonds that mature in less than a10 years. Due to the market's fear of recession, you can actually make more on such bonds by taking less risk. The yield on the 5-year Treasury is actually higher than the 10-year at 4.3%.
If you buy bonds from TreasuryDirect, you won't pay any fees. But there's a catch. You'll need to register for an account. And you won't be able to monitor your positions from your existing brokerage account.
Using Bond ETFs For Simplicity
Most investors use their online brokerage as their financial cockpit. And for some, the convenience of owning Treasuries in the same account they hold other investments helps with tracking and monitoring them.
And there are scores of bond ETFs that slice and dice the market into any form to suit your goals. Among the most popular bond ETFs is the $85.8 billion-in-assets iShares Core U.S. Aggregate Bond ETF. It sports an SEC yield of 4.1%. Keep in mind that's up dramatically from the 2.5% it yielded over the past 12 months.
You'll pay an annual fee of 0.03%. But you'll be able to buy and sell from your regular brokerage. Also, you get diversification, as the ETF buys new bonds and the ones it holds mature. Additionally, it owns more than just Treasuries. About a quarter of the holdings are corporate bonds.
If you just want to own Treasuries, there are other options. For long-term Treasuries, there's the iShares 7-10 Year Treasury Bond ETF with an SEC yield of 3.8%. And if you only want shorter-term options, there's the iShares 1-3 Year Treasury Bond ETF yielding 4.6%.
Todd Rosenbluth of VettaFi thinks "it's a great time to invest in" ultrashort bond ETFs." These own bonds that mature in less than a year. The SPDR Bloomberg 1-3 Month T-Bill ETF and the iShares Short Treasury Bond ETF are two options. "BIL's 4.3% and SHV's 4.5% 30-day SEC yield are compelling given the limited risk," he said.
Going For CDs And Savings Accounts
But when rates are as high as they are now, you can go old school and get decent returns, too. FDIC insured certificates of deposit and high-yield savings accounts are decent places to park cash now.
"Right now, the top-yielding savings account in our Bankrate database is 4.55%," said Ted Rossman of Bankrate.com. "A year ago, the top position was just 0.75%. The current 4.55% is a really attractive yield."
CDs are an option, too. Just know you'll pay a penalty if you need to take money out prior to the CD's term. And rates aren't much higher than savings accounts.
"Top-yielding liquid savings accounts have similar rates to the top-yielding 5-year CDs. We have the top of the 5-year CD market at 4.54% right now," Rossman said. "If someone wants a guaranteed return and knows they won't need the money for at least five years — such as a retiree, perhaps — then maybe it makes sense to lock in that rate (in case rates fall)."
Most Popular Bond ETFs
All are yielding 3% or more
| ETF | Symbol | SEC Yield | Assets ($ billions) |
|---|---|---|---|
| Vanguard Total Bond Market | 4.40% | $87.5 | |
| iShares Core U.S. Aggregate Bond | 4.10% | 85.6 | |
| Vanguard Total International Bond | 3.00% | 46.9 | |
| Vanguard Short-Term Corporate Bond | 5.22% | 40 | |
| Vanguard Intermediate-Term Corporate Bond | 5.36% | 40 | |
| Vanguard Short-Term Bond | 4.74% | 36.8 | |
| iShares iBoxx $ Investment Grade Corporate Bond | 5.28% | 33.6 | |
| iShares National Muni Bond | 3.22% | 31.3 | |
| iShares 20+ Year Treasury Bond | 3.86% | 30.7 | |
| SPDR Bloomberg 1-3 Month T-Bill | 4.35% | 27 |
Sources: IBD, S&P Global Market Intelligence, ETF.com, Morningstar
Follow Matt Krantz on Twitter @mattkrantz
