June 2017: Searching for Yield for Cash and Bond Money

Searching for Yield for Cash and Bond Money

By:  Dwayne Jackson, CFP, CPA
Published:  June 20, 2017

The financial crisis ushered in an era of unprecedented interest rate declines. While interest rates were declining, traditional bond funds went up in value. As you know, bonds go up when interest rates go down.  The F Fund (Bloomberg Barclays US Aggregate Bond Index) was a beneficiary of this interest rate decline cycle with returns of 5.99% in 2009, 6.71% in 2010, 7.89% in 2011 and 4.80% in 2012. At the same time, the G Fund annual returns were falling from 2.97% in 2009 to 1.47% in 2012. However, starting in 2013, the F Fund’s annual returns started to decline, with the exception of 2014’s return of 6.73%. 2013 was a negative year at -1.68% and 2015 was a struggle at 0.91%. At the same time, interest rates at banks for savings accounts and short-term CD’s and brokerage firm’s money market accounts fell below 1%, often to 0.01%. The Federal Reserve has finally started inching rates upward, but overall they are still near historic lows.

The above interest rate cycle has left investors scrambling to find some respectable yield in the cash and bond allocations in their portfolios. As noted above, bonds do well while rates are falling, but the opposite is true. A rule of thumb is that for every 1% rise in interest rates, bonds will fall in value 1% for every year until maturity. If interest rates were to rise 1%, an investor holding a bond with 7 years to maturity will suffer a 7% loss in value. The investor will receive the face amount of the bond at maturity, provided the issuer is still solvent. The F Fund’s duration, according to Bloomberg Barclay’s, is 6 years. However, The Fed’s actions of late reflect a very slow interest rate increase cycle. It appears that a 1% rise in any given year is not likely.

So what are investors to do in an era of very low, but rising interest rates to try to get some return on their cash and bond portfolios? Here are some options.

Cash Accounts: Consider the use of an online bank. Savings account rates are in the 1% per year range. This is better than the traditional brick and mortar options, but still below inflation.

Certificates of Deposit: CD rates vary from institution to institution, but rates are generally in the annualized range of 1.2% for three months and increasing to about 2.35% for 5 years. The rate is better, but you may have early withdrawal penalties and you are locking in these rates while the rates are rising in general. Be careful.

Individual Bonds: This was taken from the Schwab Trading System website on June 19, 2017.

Again, we need to be careful of the relationship between bonds and interest rates. When interest rates are increasing, you might be forced into holding the bond to maturity to receive its face value.

The next step in striving for yield is in the area of Treasury Inflation-Indexed Securities (TIPS), lower credit quality bonds and bond funds such as floating rate bonds, strategic income funds and alternatives, sometimes called hedge funds. These investments are subject to a greater variety of risk and volatility than the one’s mentioned above are beyond the scope of this newsletter.

Mr. Jackson has been a presenter with NITP for over 15 years addressing both retirement and mid-career level groups.   His areas of specialization are financial planning, investment management, tax and retirement planning. 


  • This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Rembert Pendleton Jackson can assist in determining a suitable investment approach for a given individual, which may or may not contain the strategies outlined herein.
  • Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, asset class, or investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.
  • The Bloomberg Barclays US Aggregate Bond Fund is an unmanaged index used as a general measure of bond market performance. You cannot invest directly in an index. Accordingly, performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.
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