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Where Can I Get 5%?

By Brian Schaff
Despite the recent rally in bonds, there are still opportunities to invest at 5% yields. The Treasury curve is a nice reflection on broader fixed income markets right now. The ability to get 5% past one year in Treasuries and Agency bullets might be gone, but there are other structures and products available to cross the threshold. As such, the question may not be “where can I get 5%?” but rather “what are the most effective strategies at 5%?”

The graph above shows how the Treasury curve has shifted since the start of November. The longer end, past about five years, is currently down 40-50 basis points. In many cases, the interest rates we’ve become comfortable with and accustomed to seeing are no longer available. However, the good news is rates are substantially higher when we view within the context of the rate environment over the last decade plus. Given the ability to grab 5% in quality bonds, this environment is still favorable to investors. Here are a few concepts we believe you should keep in mind when capitalizing on today’s market:

Municipal Bonds: On tax-free and taxable municipal bonds, be careful about sacrificing credit quality or drifting out of your comfort zone on characteristics to pick up extra yield. Tax-free bonds, especially general market bonds, have the added cost of the TEFRA penalty to consider, but are generally the better investment for higher tax bracket banks if the bonds are Bank Qualified. Going further out on the curve serves the dual purpose of locking in yield while also making it easier to achieve over 5%, whether that be your taxable equivalent yield or book yield.


Agency Callables: It’s easy to source 5% here without call protection, but the key is finding the right balance between yield and keeping that yield on the books.
Mortgage-Backed Securities: Great value across the board with spreads historically wide right now. A blend of longer fixed rate pools and short months-to-reset adjustable rate pools can provide balance and diversification to the portfolio.
CDs: Callable CDs typically have short call dates, making non-callable CDs better investments in this rate environment. 5% offered from 1-2 years, making this a good FDIC insured Fed Funds alternative with spread over Treasuries.