How Higher Yields Can Protect Fixed Income Investments
When a fixed income investment has a yield that is more than the duration of the investment, it provides investors with “cushion” to help protect against the loss of value created by rising interest rates.
Current Yields Are Providing Investors with “Cushion”
Bloomberg U.S. Gov’t/Credit 1-3 Year Index
- Short term interest rates, as measured by the Bloomberg U.S. Government/Credit (Gov’t/Credit) 1-3 Year, are currently almost 400 basis points (bps) higher than 2021 levels.
- If interest rates/credit yields increase by 100 bps, an investor that has a short duration investment with a yield of 4.21% and a duration of 1.9 years can still have a positive total return of 2.31%, due to the yield cushion on the investment.
The current investment opportunity also exists in the municipal market. Short duration tax-exempt yields are currently 2.9% (4.46% Tax Equivalent Yield @ a 35% Tax Bracket) with a duration of 1.44, allowing a tax-exempt investor the opportunity to capture investment cushion in the municipal market.