Make a buck off rising rates

NEW YORK (CNNMoney.com) -- The recent run-up in interest rates may be a letdown to someone looking for a home loan, but it could spell dollar signs for investors with money to lend.

Four years ago, when rates were around 1 percent, loan-based investments like certificates of deposit (CDs) and money market funds weren't attractive because their payoffs rise and fall along with rates.

But now they're looking a lot better as interest rates have risen above 5 percent on inflation concerns.

CDs are loans that consumers make to a bank for a set period of time, while money market funds are mutual funds that invest in short-term debt.

Investors don't expect huge returns from these investments, because they're low-risk. You get all the money you invested back, plus the interest it's earned. With safety though, you give up risk and the potential payoff that stocks can deliver over the long term.

If you're afraid of the stock market or want a safe, short-term investment, now is a perfect time to lock in a high interest rate on CDs or bond funds, said Eric Tyson, author of Personal Finance for Dummies.

Greg McBride, Senior Financial Analyst with Bankrate.com said they finally look like a safe way to make money while avoiding a roller coaster stock market.

"The top-yielding CDs are over the 5.4 percent mark right now," he said, "which means there's a big difference between what the average bank is paying and what you can get.

Investors want to keep an eye on government-issued Treasury bonds because they influence interest rates on CDs and money market funds. But they're not directly tied to these investments, so there is some lag between the two. Bond rates are up now, but rates on CDs and money markets have yet to follow.

Rates can change quickly, but you can compare current yields on Bankrate's CD & Money Market Rates page, and bank account rates on itsChecking & Saving Rates page. Bankrate also offers an alert system that emails users when CD rates reach a level they specify.

When trying to decide where to put your money, the most important consideration is how soon you'll need it, said McBride.

If you're investing emergency money that you may need quickly, rule out the CDs, he said. Despite their more attractive recent returns, they have large withdrawal penalties that cut into your payout.

A money market fund is the ideal place to put your money if you plan to use it in the next year or so, said Tyson.

"You're not putting your principal at risk, and you will get a higher return than on most CDs," he said. Tyson cited Vanguard's Prime Money Market Fund, which currently yields 5.12 percent and has low fees.

Tyson said that a unique kind of bond called Treasury Inflation-Protected Securities (TIPS) could be right for investors who believe rates will go even higher and stay there.

"If you're really afraid of higher inflation and higher rates, then TIPS are probably a good way to go," he said. "They'll protect against rates climbing again."

But he warned he sees no signs that inflation is going to jump in the near future.

If you think rates are near their peak now, Tyson said, then TIPS would be a mistake, because their payout would actually decline with inflation. Instead you should try to lock in a good rate on a money market fund or CD.