Money For the Rest of Us

More Ways to Lock in Higher Yields in Case Interest Rates Fall

Jan 31, 2024

The podcast discusses options for locking in higher yields, including the risks of buying long-term bonds, the impact of volatility drag on bond ETFs, and why interest rates won't necessarily go up when the government issues more bonds. They also explore CDs, fixed annuities, and zero-coupon bonds as alternative investment options. The episode highlights the performance of the iShares 20+ Year Treasury Bond ETF and discusses different investments and their limitations. Additionally, it covers zero-coupon bonds and the concept of tax equivalent yield and portfolio diversification.

27:01

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Quick takeaways

Bank certificates of deposits (CDs) and fixed annuities are two options to lock in higher yields with fixed terms and low default risks.

Zero coupon bonds provide an option to lock in higher yields without cash flow concerns, although they are more interest rate sensitive and used for speculating on interest rate changes.

Deep dives

Locking in Higher Yields: Bank Certificates of Deposits

Bank certificates of deposits (CDs) offer a way to lock in higher yields. CDs are issued by banks or credit unions and are insured by the government. They have a fixed term and offer interest, which is credited to the CD. Although there may be early withdrawal penalties, broker CDs can provide more flexibility. CDs can be taxed annually on the interest earned. For example, Schwab offers 5-year broker CDs with a 4.1% yield.

Introduction

2min

Factors Affecting Interest Rates and Importance of Locking in Higher Yields

3min

Analyzing the Performance of the iShares 20-plus-year Treasury Bond ETF

13min

Exploring Various Investments and Their Limitations

2min

Zero Coupon Bonds and Locking in Higher Yields

6min

Exploring Tax Equivalent Yield and Portfolio Options

3min

Professional investors and other market participants are lousy at forecasting interest rates. Here are three more options to lock in higher yields today.

Topics covered include:

The risk of buying long-term bonds and ETFs to benefit from falling yields
How volatility drag has impacted a long-term bond ETF like TLT
Why interest rates won't go up just because the government issues more bonds
How CDs, fixed annuities, and zero-coupon bonds work
We compare and contrast the seven fixed-income options reviewed in this two-part series

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Show Notes

Investors may be getting the Federal Reserve wrong, again—The Economist

Today's Best Multi-Year Guaranteed Annuities—Immediate Annuities

Zero-Coupon Treasuries Flew Off Shelves During October Yield Surge by Elizabeth Stanton—Bloomberg