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The Federal Reserve Raises Interest Rates: What It Means for Fixed Income Investors
Treasurys: Safety and Yield
Investors looking for higher interest income from their cash holdings can turn to Treasury bills. By creating a ladder of Treasurys with different maturities, investors can reinvest the proceeds from maturing bonds into longer-dated issues or move the money back into stocks. However, it's important to note that at some point, the Fed will normalize its policy and rates will come down, leaving fixed income investors with fewer options for attractive yields. This reinvestment risk is why strategists suggest incorporating duration, the sensitivity of a bond's price to interest rate changes, into portfolios.
CDs and High-Yield Savings Accounts
Online banks have increased rates on certificates of deposit (CDs) and high-yield savings accounts to attract depositors. For example, Bread Financial offers a 4.9% annual percentage yield (APY) on its savings account and a 5.35% APY for its 1-year CD. However, investors should be aware that these rates can be adjusted at any time. Minimum account balances, monthly maintenance fees, and transfer limits should also be considered. For investors with laddered CDs, it may be worth looking into longer maturities, such as 2-year to 5-year instruments, to lock in yields before they start to decline.
Money Market Funds
Money market funds provide a safe place for investors to park their assets and earn some yield. The Crane 100 Money Fund Index has an annualized 7-day current yield of 4.96% as of July 25. When considering money market funds, it's important to examine the underlying assets, as some funds hold Treasurys while others invest in short-term corporate paper with higher yields but also higher credit risk. Investors should also be mindful of any fees that could impact overall returns.
Conclusion
While the Federal Reserve's interest rate hikes offer fixed income investors the opportunity for higher yields, it's crucial to diversify investments and avoid putting all funds into a single income-paying asset. Cash may currently provide a good yield, but it is unlikely to keep up with inflation in the long term. Therefore, investors should carefully consider their goals and risk tolerance when building a balanced portfolio of fixed income investments.
New Business Implications
The impact of the Federal Reserve raising interest rates extends beyond fixed income investors and can also affect new businesses. As interest rates increase, borrowing becomes more expensive, which can have implications for startups and entrepreneurs seeking funding.
One significant consideration is that higher interest rates can deter potential investors and lenders from providing capital to new businesses. With the cost of borrowing rising, investors may become more reluctant to take on the risk associated with funding a startup. This could lead to limited access to capital, making it challenging for new businesses to obtain the necessary funds to launch and grow.
Additionally, higher interest rates can also affect consumer spending patterns. When borrowing costs increase, individuals may have less disposable income to spend, resulting in decreased demand for products and services offered by new businesses. Consequently, startups may face difficulties in attracting customers and generating revenue.
On a positive note, businesses in industries that offer higher returns can benefit from the rise in interest rates. Investors seeking alternatives to fixed income investments may be more inclined to invest in sectors that offer potentially higher yields. Therefore, new businesses operating in these industries could see increased interest and investment inflows.
In conclusion, the Federal Reserve's decision to raise interest rates can impact new businesses in various ways. While it may become more challenging to secure funding and attract customers, businesses in industries with potentially higher returns may benefit from increased investor interest. New businesses must closely monitor market conditions and adjust their strategies accordingly to navigate the changing landscape influenced by interest rate hikes.
Article First Published at: https://www.cnbc.com/2023/07/26/feds-rate-hike-today-is-about-to-sweeten-yields-on-these-investments.html.svg)
