Tips On Grabbing Higher Yields

There currently exist very few ways of investing safely while earning a decent return.   Those investing in CDs or Treasuries are painfully aware of the ridiculously low yields available on short-term and even long term instruments.

There are two different forms of risk when investing in fixed income.  One of these is credit risk, or the risk of default.  The second risk is referred to as "duration", or the risk of an adverse move in the overall level of interest rates.  Duration is derived largely from a bond's date of maturity.  The more distant the maturity date, the greater the duration.  In turn, as a bond's duration increases, so will its sensitivity to an upward move in interest rates.

One form of higher yielding instruments, which avoid both types of risk, are known as "TIPs", or Treasury Inflation Protected Securities.  They have certain attributes far different from any other type of fixed-income vehicle.  For example, while they DO pay interest they also have a feature which affords protection against inflation as the name suggests.

The "principal" amount of a TIP is adjusted semi-annually for the increase or decrease in the reported Consumer Price Index (CPI).  For example, if the CPI is reported at 6%, the holder receives a corresponding amount in additional prinicipal.  Regardless of the direction of inflation, TIPs will NEVER return less than zero and will mature at 100% of face value as they are an obligation of the U.S. Government.

A variant of TIPs are called I-Bonds (IBs), which are similar to "savings bonds".  However, one can only buy a very limited amount of IBs each year per social security number. You won't receive interest from your IBs until they mature.  The minimum holding period is one year.

TIPs and IBs DO differ in terms of their respective taxable status.   They are both exempt from state and local tax, but not federal tax.  TIPs require the holder to pay tax on distributions and the "phantom" income accrued if the principal is adjusted upward for the rate of inflation.  Therefore, TIPs are probably a better choice for IRAs, while IBs are typically preferred for other types of accounts.   However, it would be prudent to verify tax treatment with your accountant.

Finally, TIPs are available via Exchange Traded Funds (ETFs), but these are relatively new.  My personal favorite has the symbol "TIP" ( What else?) and trades on the New York Stock Exchange.

I hope you find these "tips" on grabbing higher yields a real winner.

Please feel free to leave comments below.

Marko's Take

P.S.  Gold actually breached the $1,100 barrier I spoke of two days ago.  However, the penetration took place only in the final 15 minutes of very thin trading yesterday and was a mere $3 per ounce.  Please do nothing today.  I'll need to explain why later.  Beginning Monday, if Gold breaks below $1,100, use that as your "stop loss" point and once Gold penetrates $1,100 on the upside, it should be safe to re-enter the market.