Cushion your portfolio in 2025 with these fixed income assets

Investors are facing the prospect of “higher for longer” interest rates, and that presents an opportunity for those who want to build up portfolio income. The Federal Reserve dialed back its expectations for 2025 rate cuts at its December meeting, penciling in only two reductions this year – down from the four predicted in September. Inflation fears have also grown of late, spurring Bank of America to revise its forecast to zero cuts in 2025. At the same time, the 10-year Treasury yield has been on a steady upward march since late 2024, briefly topping 4.8% on Tuesday. Bond yields and prices move inversely to one another. But the news isn’t all that bad for income-seeking investors. “We’re a few days into January, but this volatility is persisting,” said Steve Laipply, global co-head of iShares Fixed Income ETFs. “Coupon clipping on the short end of the curve, building up that income cushion over time – that’s the way to orient the fixed income part of your portfolio.” The Fed’s steady hand on rates – the target range for overnight fed funds is now at 4.25%-4.5% – results in solid yields for short-duration instruments like collateralized loan obligations and bank loans. It also means investors may be able to enjoy – for at least a little while longer – the attractive income interest they’re collecting from instruments like money market funds, certificates of deposit and Treasury bills. “If you can make a little bit of extra money here or there by being intentional when investing in short-term securities, it makes sense,” said Paul Olmsted, senior manager research analyst, fixed income, at Morningstar. “You’re getting paid well versus a number of years ago when you made nothing on the front end.” Getting paid to wait Cash shouldn’t make up the lion’s share of a diversified portfolio, but for investors who want to set aside some funds for a large upcoming purchase or who want to get a little interest on their emergency funds, a high-yield savings account or a money market fund can do the trick. Several banks still offer annual percentage yields exceeding 4% on savings accounts, including LendingClub , Synchrony Financial and Bread Financial . Money market funds also offer investors liquidity and healthy yield. The Crane 100 Money Fund Index has an annualized seven-day current yield of 4.19%. “Make sure your money is working for you,” said Catherine Valega, a certified financial planner at Green Bee Advisory. “You have extra cash for emergency savings – it can now earn something.” In particular, she recommends keeping the equivalent of six- to 12 months of expenses for emergency savings in a high-yield savings account, a money market fund or Treasury bills. Interest income on Treasury bills, notes and bonds is subject to federal income tax, but exempt from all state and local income taxes, the Internal Revenue Service says. For investors who want to lock in rates – and can resist cashing out before maturity – CDs can still offer a good opportunity. Marcus by Goldman Sachs offers a 12-month CD with an APY of 4.25%, while Bread Financial has a CD with a similar maturity with a 4.1% APY. Portfolio income Beyond near-term cash needs, investors can diversify their fixed income holdings by adding some exposure to short-duration assets. These instruments – which also tend to have short maturities – provide income but their prices aren’t as sensitive to fluctuations in rates. “Longer duration is going to continue to be more volatile, but there are plenty of terrific opportunities on the short end of the curve,” said iShares’ Laipply. He highlighted bank loans and collateralized loan obligations (CLOs) as some examples. Institutional investors snap up bank loans – which lending institutions make to companies – and collect income from the loans’ floating coupon rate. CLOs are pools of floating rate loans made to businesses, and they’re made of tranches that have their own risk characteristics. The top-rated tranches – rated AAA – are first in line to get paid if a borrower becomes insolvent. The iShares AAA CLO Active ETF (CLOA) has a 30-day SEC yield of 5.92% and an expense ratio of 0.3%, while the Janus Henderson AAA CLO ETF (JAAA) has a 30-day SEC yield of 5.97% and an expense ratio of 0.21%. Be aware that while these floating rate products offer attractive income, they should only be a small part of a diversified portfolio. Investors need to consider their long-term goals, their risk tolerance and whether their portfolio addresses those needs. Financial advisors have been recommending that investors aim for an intermediate duration – one that’s roughly six years – so that they can capture price appreciation in their bonds once rates normalize. “You can make the case for elevated short-term yields, but I would stay diversified across different asset classes,” said Olmsted.