The Federal Reserve’s aggressive interest-rate-raising campaign to tame inflation has upended the long-held paradigm that “there is no alternative” to stocks. After last year’s stock-market selloff burned investors, many say they don’t need to buy stocks when they can lock in a 5% return with little risk.
Market participants are bracing for the potential of more interest-rate increases ahead as the economy continues to show signs of strength.
Investors have yanked $11.6 billion from stock funds on a net basis over the past five weeks, while putting a net $91.1 billion into money-market funds, according to Refinitiv.
Yields on most bonds are fixed, however, so holders of Treasurys still bear risks like rising interest rates or a resurgence of inflation.
The yield curve is still inverted, meaning short-term bonds yield more than longer ones: The one-month Treasury bill yields 5.37%, while the 30-year bond offers just 4.38%. The advantage of the longer-dated securities is the yields are locked in for longer, in case interest rates start falling again.
Cash in retail money-market funds has grown more than 25% this year to $1.5 trillion, according to Federal Reserve data. The average yield on the 100 largest taxable money-market funds reached 5.15%, according to Crane Data. That is the highest since 1999.
Money-market funds, which are a type of mutual fund that functions as a sort of bank account, are as safe as the bank that offers them. They hold only high-quality, liquid assets such as Treasurys and, in some cases, short-term corporate debt. Sometimes money-market funds require minimum balances and limit monthly withdrawals. Several funds offer yields comparable to those available from Treasurys, according to Bankrate.
Speculative-grade, or junk-rated, companies tend to offer higher interest rates to compensate investors for taking on greater risk. High-yield corporate bond funds can offer investors sizable income after fees, while also offering diversification to protect against credit risk.
Investors have been pulling money from high-yield corporate bond funds. Roughly $11 billion has left those funds on a net basis this year, according to Refinitiv Lipper.
Still, several household names, like tobacco company Altria and telecom giants Verizon Communications and AT&T, offer comparatively high dividend payouts. Companies typically pay large dividends or buy back stock when they don’t see better opportunities to invest their money in growth projects, so high dividend payers tend to be older, slow-growing firms. Payouts can rise or fall based on each company’s financial performance and investment priorities, so they are riskier yield options than a government bond.
