Comparing today's bank account and bond yields
Investment income was hard to find at the beginning of this year, and in some cases it has become even scarcer lately. However, looking though the yield differences for a variety of income-producing possibilities might give you some ideas on where to find more of that precious income.
Here is a breakdown of where yields stand on a number of today's investment options, along with some things to consider about each.
According to FDIC figures from early November, average yields on deposit products ranged from 6 basis points for savings accounts and one-month CDs, up to 78 basis points for five-year CDs.
A couple pieces of advice: First, savings account rates, money market rates and CD rates all vary greatly from bank to bank, and you can do considerably better than those national averages with some smart shopping. Second, though you might not like the idea of locking into a longer-term CD at today's low interest rates, the higher rates that come with that commitment might be worth it if you find a CD with a relatively mild penalty for early withdrawal.
Treasury bills that are six months or less in maturity yield even less than savings accounts these days, and even a five-year Treasury will get you only 1.64 percent. You can do better than that on a five-year CD with a little shopping around.
You have to move out to about the 10-year maturity mark to do better than 2 percent, but those longer bonds will be most sensitive to price declines if interest rates start to rise. All-in-all, if you want the security of a U.S. government-backed investment, you may well be better off with a CD than with a Treasury bond these days.
According to the S&P's broad muni bond index, yields declined from 3.66 percent to 3.04 percent in the first 10 months of 2014. Remember though, to compare these yields to those of other bonds, you have to figure out what the tax exemption of muni bond interest is worth to you.
Also, be advised that these bonds vary greatly in yield, depending on the issuer. You can manage your risk by taking a diversified approach, and by looking for general obligation bonds rather than those dependent on the revenues of a single project.
Yields on high-quality corporate bonds slipped from 3.11 percent to 2.69 percent over the first 10 months of this year. At that level, you might question whether the yield is worth the extra risk. Over the same time period, yields on lower-quality corporate bonds rose from 6.05 percent to 6.34 percent. That higher yield reflects their greater risk, but by rising when other yields have fallen, the yield on lower quality bonds is looking more appealing.
It is important to understand that just because an investment vehicle produces income does not necessarily mean that vehicle is safe and conservative. Default risk is a very real possibility with corporate and municipal bonds, and even Treasury bonds are subject to price fluctuations between when they are issued and when they mature.
As is usually the case, you have to take some risk in order to get some extra yield, but that risk may be a more palatable alternative than losing ground to inflation. Just be sure you recognize the risks you are taking, and make sure you have a reasonable chance of getting a worthwhile reward in return.