Amid fears of a recession last year, investors turned to ultra-conservative investments like money-market funds, certificates of deposits (CDs) and savings deposits but they are now facing razor-thin yields after several waves of interest-rate cuts.
Since October, assets increased in the most conservative investments, but during that time, the Federal Reserve had taken action to stimulate the economy by cutting the benchmark interest rate at which banks lend money to each other to 2 percent from 5.25 percent in September. That means investors would find safety but yield little in terms of returns.
To give readers an idea, according to Bankrate.com, six-month CDs are yielding an estimated average of 1.8 percent and iMoney.net shows taxable retail money-market funds are averaging an estimated 2 percent.
Currently, it is challenging for investors to find safe investments with better yields. It's especially hard since a lot of those investments such as auction-rate securities and ultra-short mutual funds turned out to be a lot riskier than expected. The auction-rate market collapsed in February this year after investors fled from those securities. Meanwhile, the value of ultra-short funds holding big chunks of sub-prime asset-backed securities has plummeted. For example, Schwab Yield Plus is down 28 percent over the past year.
Investors may be tempted by high-yield (aka "junk") bonds, which compensate investors for their extra risk with much higher interest rates (the average yield is 7.9 percent). But investors should beware. Companies with unstable credit issue junk bonds and defaults tend to rise during recessions.
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