Investors are currently navigating the reality of potentially enduring higher interest rates for an extended period. This scenario presents a unique opportunity for those looking to enhance their portfolio income. At its December meeting, the Federal Reserve revised its expectations for rate cuts in 2025, reducing the predicted two cuts for the year, a change from the four cuts anticipated back in September. In the backdrop of growing inflation concerns, Bank of America has even moved to project zero rate cuts for 2025. Concurrently, we’ve observed a persistent rise in the 10-year Treasury yield since late 2024, which briefly surpassed 4.8% on Tuesday. It’s important to note that bond yields and prices typically move in opposite directions.
Despite these challenges, income-seeking investors have reason to be optimistic. “We’re only a few days into January, yet volatility persists,” noted Steve Laipply, global co-head of iShares Fixed Income ETFs. He suggested that leveraging the short end of the yield curve and gradually building an income cushion over time is a pragmatic approach to managing the fixed income portion of a portfolio. With the Federal Reserve maintaining its steady rates—currently at a target range of 4.25% to 4.5%—short-duration instruments such as collateralized loan obligations (CLOs) and bank loans are offering substantial yields. Additionally, investors can continue to enjoy favorable income from money market funds, certificates of deposit (CDs), and Treasury bills for a bit longer.
Paul Olmsted from Morningstar highlighted the potential benefits of intentional investment in short-term securities. “Extra income from these securities is worthwhile, especially compared to previous years when returns were minimal,” he noted. Investing in high-yield savings accounts or money market funds could be ideal for those wishing to set aside funds for future expenses or simply earn some interest on emergency savings.
Many financial institutions, including LendingClub and Synchrony Financial, still provide savings accounts with annual percentage yields over 4%. Money market funds are another option, known for offering liquidity alongside attractive yields. The Crane 100 Money Fund Index, for instance, has an annualized seven-day yield of 4.19%. Catherine Valega of Green Bee Advisory recommends utilizing your cash efficiently, suggesting six to twelve months of expenses be held in high-yield savings accounts, money market funds, or Treasury bills for emergencies. Treasury-related interest income is subject to federal tax but remains exempt from state and local taxes, according to the IRS.
For those prepared to lock in rates and avoid withdrawing before maturity, CDs present a good opportunity. Marcus by Goldman Sachs and Bread Financial both offer 12-month CDs with competitive APYs of 4.25% and 4.1% respectively.
When considering portfolio income beyond immediate cash requirements, diversifying into short-duration fixed income assets is advisable. These assets—characterized by short maturities—can offer stable income with less sensitivity to interest rate changes. “While longer durations remain volatile, there are excellent opportunities in short-term investments,” noted Laipply, citing bank loans and CLOs as examples. Institutional investors often purchase bank loans or pool these loans into CLOs, benefiting from floating coupon rates and tranches with varied risk qualities. CLOs rated AAA provide priority payments if the borrower faces insolvency. The iShares AAA CLO Active ETF (CLOA) and Janus Henderson AAA CLO ETF (JAAA) offer impressive 30-day SEC yields over 5.9% with low expense ratios.
These floating rate products, while attractive, should only form a small part of a diversified portfolio. Investors must align their selections with long-term objectives and risk tolerance. Financial advisors recommend an intermediate duration strategy, around six years, to optimize price appreciation when rates normalize. As Olmsted advises, while short-term yields are appealing, maintaining diversity across asset classes is crucial.
