6 Best Fixed Income Investments For A Low-Rate Environment (2024)

The historically low interest rates we’re seeing in 2020 show no sign of abating. Fed Chair Jerome Powell recently announced his intention to keep rates low through at least 2023. Meanwhile, real yields on government bonds—or yields after inflation—are negative.

This extreme low-rate environment presents challenges for fixed-income investors, particularly for people who are nearing retirement or are already retired. While there is no silver bullet solution, there are several strategies to consider as you navigate these difficult waters.

Adjust Your Expectations

The starting point for fixed-income investing in a time of ultra-low rates is to set the right expectations. With 30-year Treasury yields below 1.5% and shorter-duration yields well below 1%, it’s unrealistic to expect 5% from a low-risk investment. There are some fixed-income investments that pay higher yields, as we’ll see below, but they come with additional risk.

Taking on more risk may be appropriate in some cases. It’s important, however, to understand these risks, and how they may affect your overall portfolio and investment goals. For fixed income investors, this may include accepting slightly higher credit risks. With the Fed now openly rooting for higher prices, inflation risks may rise over the medium term.

Now that we’ve adjusted our expectations, let’s look at six of the best fixed-income investment alternatives to consider for those looking to boost their yields.

Best Fixed Income Investments for a Low-Rate Environment

1. Online Savings Accounts

The current yield on a 1-month Treasury bill is less than 0.10%—that’s also approximately the average APY traditional banks offer for savings accounts. Online banks, however, are still offering significantly higher rates. While the APYs for online savings accounts remain low by historical standards, these FDIC-insured accounts offer a safe way to earn a little extra yield on a demand deposit account.

The best online savings account rates available right now are paying 0.50% and 0.80% APY. Keep in mind that real rates, that is after accounting for inflation, are negative. Online banks, however, do offer much better rates than short-term government bonds or most money market accounts.

2. Certificates of Deposit

Some certificates of deposit (CDs) may offer slightly higher rates than savings accounts. They also allow you to lock in the rate for the term of the CD. That can be a negative if rates start to climb again, but rates are more likely to keep declining this year, making it a smart move to lock in rates on at least a portion of your fixed-income portfolio.

You can still find rates as high as 0.85% on a one-year CD. Keep in mind that rates can—and do—change daily.

A CD ladder is a great way for investors to take advantage of even higher rates on longer-term CDs while still getting regular access to the cash held in certificates as they mature.

You can also get CDs with unique features, like no-penalty CDs, which do not charge a penalty if you withdraw your money before maturity. Bump-up CDs enable savers to increase the rate of the CD during the term if prevailing rates rise. Depending on the term, you may be able to bump up the rate twice during the term of the certificate. Just keep in mind that these features usually come with slightly lower APYs.

3. Corporate Bonds

If you’re looking to buy bonds that offer higher yields, one option is investment-grade corporate debt. These bonds are issued by companies with solid balance sheets and cash flow. While the risk of default is higher than with Treasuries, investment-grade bonds are still considered reasonably safe from default.

The current yield on a 10-year Treasury is about 0.70%. In contrast, the yield on a 10-year investment grade corporate bond is just under 2.00%.

Like Treasury bonds, corporate bonds have the same potential to lose money as interest rates rise. To maintain the average maturity of a fund over time, fund managers continually buy and sell bonds—in a rising rate environment, selling bonds effectively locks in losses. For this reason, some investors prefer to invest directly in bonds that they can hold until maturity. While this gives investors more control over the investment, it can be expensive and time consuming.

4. Defined-Maturity Bond ETFs

A defined-maturity bond exchange traded fund (ETF) combines the simplicity of bond funds with the control of individual bonds. Like a bond fund, these ETFs invest in thousands of bonds in a single fund. Defined-maturity bond ETFs offer a stated maturity at which point the fund closes and net assets are returned to shareholders.

Perhaps the most popular defined-maturity bond ETF is BulletShares, offered by Invesco. BulletShares ETFs offer investors the opportunity to invest in corporate, high-yield corporate, emerging market, and municipal bonds. Across these types of bonds, maturities range from one to ten years.

The yields vary based on the type of bond and maturity. As an example, the BulletShares 2025 Corporate Bond ETF (BSCP) currently yields about 2.21%, while the version that matures at the end of 2022 (BSCM) yields 2.02%. As with CD ladders, you could also ladder these BulletShares ETFs.

5. High-Yield Bond ETFs

Invesco also offers high-yield corporate bond funds that pay even higher yields. For example, the Invesco BulletShares 2025 High Yield Corporate Bond ETF (BSJP) currently yields about 5%, nearly 3% more than the corporate bond fund with the same time to maturity.

Here it’s important to keep in mind that high-yield corporate bonds present significantly greater risk of default. In return, investors receive higher yields. You should evaluate these risks before “reaching for yield.”

6. Municipal Bonds

Municipal bonds can offer investors higher yields and tax advantages. Income from munis are generally tax exempt at the federal level, and may also be tax-free at the state level. As a result, rates on munis are generally lower than other comparable bonds.

For investors in higher tax brackets, munis may offer a compelling investment on an after-tax basis. This also means that munis should be held in taxable accounts only, rather tax-advantaged retirement accounts.

Final Thoughts

As you re-examine your fixed-income investment strategy, it’s important to keep in mind why you’re adding bonds to your portfolio. While generating a steady stream of income is certainly one reason, so is diversification.

Bonds are often part of an investment strategy to minimize the volatility of a portfolio. For this reason, many investors tend to focus on Treasury and investment-grade corporate bonds. If you reach for yield by choosing high-yield or emerging market debt, understand that volatility can increase, and allocating too much of your fixed-income portfolio to these more volatile instruments can blunt the advantage you were seeking in the first place.