Buy Bonds, Boost Your Return
With rates stalled and maybe falling, short-term bond funds look like a good bet
(MONEY Magazine) – Over the past year, with interest rates rising and top money funds offering a no-risk 5%, there's been no good reason to stash cash in a short-term bond fund. But now that the Fed has paused and may even cut rates later this year, the advantage seems to be shifting. Reason: If rates fall, bond prices (which move in the opposite direction) will rise, boosting your total return. A half-point drop in rates, for example, would cause short-term bond prices to rise 1%, which could push total returns on top-yielding funds above 6%. Also, bond funds hold fixed-income securities with longer maturities, so if the Fed cuts rates, they'll retain higher yields longer than money funds, which closely track rate changes. Best bet: Shift your investment cash to bonds, reserving money funds for cash you'll spend soon.
SAVINGS NOTES AND SOURCES: CD and money-market account data as of Dec. 12 from 100 Highest Yields, a publication of Bankrate.com ($124 for 52 issues; 800-327-7717, ext. 11410); all have a minimum investment of $10,000 or less. Average tax-exempt and taxable money-market fund yields for the week ended Dec. 12 from Money Fund Report (imoneynet.com); all have a minimum investment of $10,000 or less and assets of $25 million or more. Average bond fund yields for the month ended Nov. 30 from Lipper; all are medium- and high-quality funds without sales loads and with average maturities of three years or less. ¹Manager absorbed all or some operating expenses. CREDIT NOTES AND SOURCES: All rates subject to change. Credit-card rates are for standard cards as of Dec. 12 from Bankrate.com and are variable unless otherwise indicated. Survey does not include Internet-only cards or AmEx Blue. ¹Fixed rate. ²Visa only. ³Platinum and gold cards.