We are in the midst of a changing interest rate environment.

Yields on the benchmark 10-year Treasury note fell below 4% last month. The consumer price index (CPI) fell to 2.9% in July. As of press time, the federal funds futures market expected the Federal Open Market Committee (FOMC) to cut interest rates at its September meeting.

Everyone is operating with cracked crystal balls. So, we can’t accurately predict what will happen with interest rates. We can give you information to help you make the best decision for your portfolio based on what is known now.

There are three articles in this issue tied to the subject of interest rates and yield.

Breakeven Rates Signaling Lower Inflation

This month’s Dispatches: Illustrating Trends revisits breakeven rates. The five- and 10-year breakeven rates show you the expected level of inflation implied in Treasury bonds over the two periods. Both are signaling lower levels of inflation than they previously did. Plus, the five-year breakeven note forecasts inflation to be below the Federal Reserve’s 2% target rate. Charts of both breakeven rates can be found in the article.

Bond Strategies for a Changed Environment

Seeing interest rates pulling back, I reached out to longtime AAII Journal contributors and bond experts Hildy Richelson and Stan Richelson. Their latest article compares and contrasts several bond strategies for a falling interest rate environment.

Staying near the short end of interest rates—such as by locking in a high-yielding certificate of deposit (CD)—gives you both greater flexibility and more income now. The downside is that interest rates could be lower when the CD or short-term bond matures. Some of you may be comfortable with that risk while others may not. I would suggest factoring in the timing of when you will need the money.

Bond ladders help you spread out the timing risk of future interest rates. They involve buying debt securities with different maturities. Bond ladders can also be used to match your investments with your future cash flow needs. Some financial planners like bond ladders for this reason.

Barbells are a long-used strategy that strikes a middle ground. They involve purchasing a short-term debt instrument with a longer-term one. You get flexibility and currently higher interest rates on the short end. On the long end, you get certainty about the coupon (interest) payments you will receive. You could combine a CD with a longer-term bond to create a barbell as well.

The Richelsons offer additional strategies in their article. If you are trying to determine what to do with the CDs and bond side of your portfolio, you’ll find helpful ideas.

High-Yield ETFs and Mutual Funds

The inspiration for the third article comes from The Wall Street Journal’s article about “boomer candy.” The term refers to exchange-traded funds (ETFs) that combine stocks with covered calls to generate more income. (Covered call strategies involve writing—selling—call option contracts on stocks you own.)

Cynthia McLaughlin expanded the scope of the topic with an article that covers both the highest-yielding equity-focused ETFs and the highest-yielding equity-focused mutual funds widely available to individual investors. Many of these funds have comparatively high tax-cost ratios. The higher the tax-cost ratio, the more return you lose to taxes.

Performance relative to category peers was not good overall. Yields were high but expense ratios were generally on the high side too. Most of the funds were small in terms of total assets.

In gathering the data, Cindy came across a group of specialty covered call ETFs from YieldMax. These ETFs are tied to stocks like Tesla Inc. (TSLA) as well as the Ark Innovation ETF (ARKK). They are undiversified and expensive. I personally will be staying away from them.

Wishing you prosperity and good health,