I am frequently asked about ideas for “safe” places to “park” cash, outside of a bank account.
With interest rate risk on the rise, it remains important to not extend maturities with fixed income.
High grade corporate bonds with short to medium term maturities are a good option.
Every type of investment can have a proper place in one’s portfolio, depending on the individual allocation plan. Factors such as age, risk tolerance, income needs, overall wealth levels, short-term needs, etc. all influence the proper portfolio construction. As a fixed income specialist focusing on constructing portfolios of individual bonds, certain lower yielding and higher grade corporate bonds are part of my “toolbox,” and can be appropriate for certain “safer” portions of an overall portfolio. These bonds also satisfy the question: is there a super-safe place to invest my money but earn more than 1%? Here are some of the bonds I am buying for clients now:
Verizon Communications (NYSE:VZ), 2.625% of 2/21/2020 (just under three years), offered at about 100.3-100.4 with a Yield-to-Maturity of 2.5% (CUSIP: 92343VCH5).
Citigroup (NYSE:C), 2.4% of 2/18/2020, offered at a hair below par, with a Yield-to-Maturity of 2.4-2.45% (CUSIP: 172967JJ1). Similar yield and maturity as the Verizon bond, both rated Baa1/BBB+. For an even shorter maturity, consider Citigroup’s July 2019 bonds (CUSIP: 172967HU8) offered at 100.7 to yield 2.2%.
AT&T (NYSE:T), 2.3% of 3/11/2019, offered at 100.2-100.3 to yield 2.1-2.2% (CUSIP: 00206RCC4). A decent way to park two-year money, also for a Baa1/BBB+ rated issue. Compare to the two-year U.S. Treasury rate of 1.4%. For an even shorter maturity, consider AT&T’s November 2018 bonds, slightly more than 1 1/2 years away (CUSIP: 00206RCA8) offered at 100.6 to yield 2.0%. For a bit longer, there is 2.45% of 6/30/2020 (CUSIP: 00206RCL4) offered at 99.6 to yield 2.55-2.60%.
JPMorgan (NYSE:JPM) (rated A3/A-), 2.55% of 10/29/2020, offered at par to yield 2.55% (CUSIP: 46625HNX4).
While these bonds are riskier than an FDIC insured CD, bank account, or a U.S. bond, the level of higher risk is negligible. Verizon, Citi, AT&T and JPMorgan are not at material risk of default over the time period of these bonds. These are definitely “sleep at night very easily” types of investments, and thus a good alternative to technically lower risk CDs and Treasuries. The yields, of course, reflect the low risk, but decent for “parking cash” or a certain portion of a portfolio allocation.
Another alternative to “risk free” treasuries are Apple (NASDAQ:AAPL) bonds, such as the 2.25% of 2/23/2021 (CUSIP: 037833BS8), basically a four-year bond, offered at 99.56 to yield 2.37%. The implied four-year U.S. Treasury rate is about 1.9%. Apple is rated Aa1/AA+, right below the theoretical “risk free” rate.
By owning the individual bond, an investor can “lock in” these returns without worrying about rising rates or other market factors which can affect the carrying value of these bonds. The relatively short-term nature of these bonds means that possible rising rates will not have a material “opportunity cost” risk.
The other alternative is to purchase traded CDs on a brokerage platform like Schwab. These CDs can be sold at anytime, so they can act like a short term bond but also have liquidity. Right now on Schwab, I am seeing three year CDs offered at about a 1.85%-1.90% YTM, two years at 1.5%-1.7% range, and one year in the 1.0%-1.1% range.
Finally, by checking the municipal bond inventory of your brokerage daily based a certain search parameters, you may be able to find smaller lots that offer decent yields for the risk. For example, right now I see a small offering of Aaa/AA+ Florida municipal bonds (Housing Finance Corp.) yielding 2.0% maturing 1/1/2020 (CUSIP: 34074MFV8). For high tax bracket accounts the yield is excellent for the credit risk and under three-year maturity.
For investors “sitting” on too much cash or worried about any type of “risk” investment, or for the “safe” portion of a broad portfolio allocation, these fixed income instruments are a good option. The benefits of owning the individual bonds are significant, and a better choice in my opinion than investing in a short term bond fund.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.