Investors In Ultra-Conservative Funds Face Ultra-Low Yields
When fears of a recession started in 2007, investors jumped into ultra-conservative investments such as certificates of deposit (CDs), savings deposits, and money-market funds. Now, after numerous rounds of interest-rate cuts, investors in these ultra-conservative funds face ultra-low yields.
Assets in the most conservative investments rose since last October. At the same time, the Federal Reserve tried to jump-start the economy by dropping the benchmark interest rate for banks lending money to each other from 5.25 percent in September to the current 2 percent rate.
For investors, that translates into plenty of safety but little return. As an example, Bankrate.com estimates the average yield on six-month CDs at 1.8 percent and iMoney.net calculates the average return on taxable retail money-market funds at 2 percent.
Where can investors find higher yields while keeping their money safe? The options remain extremely limited. Many investments, such as ultra-short mutual funds and auction-rate securities, proved riskier than expected. Ultra-short funds that hold large amounts of subprime, asset-backed securities shed their value over the last year. For instance, Schwab Yield Plus plummeted 28 percent. Meanwhile, the auction-rate market imploded last February when investors sold off those securities in mass.
With these low returns on safe options, investors may look at high-yield (“junkâ€) bonds, where the extra risk comes with much better interest rates—the average yield currently sits at 7.9 percent. But investors need to remember that firms with unstable credit issue junk bonds and defaults often come out of the woodwork in times of recession. Buyer beware.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.Â
