It Is Time To Plan For Longer Duration Fixed Income Investments



Nearing mid-year, it’s an appropriate time to review income investment duration strategies. The Federal Reserve decided on June 14, 2023, to articulate a hawkish outlook, even though it did not increase interest rates. Today, the European Central Bank (ECB) decided to increase rates .25% to 3.5%, and also project a hawkish tone, warning of future interest rate hikes.

Below is a quick summary of guaranteed income yields and how they have incrementally changed in the past four months.

As of February 24, 2023, Fidelity Investment published the following Highest Yield rates for new issue CDs. US Treasury rates are quoted from a Bloomberg snapshot on this date.


Security 3 m 6 m 9 m 1 yr 2 yr 3 yr 5 yr 10 yr
CD 4.65% 4.85% 5.00% 5.10% 5.00% 5.05% 5.15%  
CD-Call Protected


4.85% 4.85% 4.95% 4.80% 4.60% 4.50%  
US Treasury 4.89% 5.09% 5.15% 5.11% 4.90% 4.54% 4.29% 3.97%

As of June 15, 2023, Fidelity Investments published the following Highest Yield rates:


Security 3 m 6 m 9 m 1 yr 2 yr 3 yr 5 yr 10 yr
CD 5.35% 5.35% 5.30% 5.45% 5.40% 5.30% 5.25% 5.25%
CD-Call Protected


5.35% 5.30% 5.35% 4.90% 4.70% 4.45% 3.85%
US Treasury 5.25% 5.31% 5.28% 5.29% 4.74% 4.33% 4.01% 3.76%

What is notable is the limited move of yields at 5 years. In fact, call protected CD yields dropped .05% and US Treasury yields drop .28%.

I have been rolling over my smaller denominated CD maturities into investments of no more than 1 year duration. I have $20,000 of corporate bonds maturing in July. They are currently earning 2.25%. I have an opportunity to significantly improve my yield and shift to CDs. The question is how should I proceed? Of course, I can easily break up the amount to different durations.

Underlying my decision will be whether I believe the Federal Reserve Board (Fed) and its hawkish tone. All along, as documented in previous articles, I have been a believer of Fed speak. I find it interesting that many financial analysts, invited to share their opinions on Bloomberg and CNBC, continue to doubt the Fed. The latest Fed dot plot is somewhat inconsistent, except for the fact that there is majority agreement that interest rates will continue to rise.

The Fed insists that it is data driven. The ongoing argument within the market is the quality of the data used by the Fed. Arguments focus on whether the Fed weighs too heavily data that resides in the past, insufficiently accounting for more current high frequency data that indicates a slowing economy. Despite the back-and-forth arguments, if I am to anticipate the Fed, I need to go by the data they rely upon.

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What is the latest data? According to the Bureau of Labor Statistics:

The Producer Price Index for final demand declined 0.3 percent in May. Prices for final demand goods fell 1.6 percent, and the index for final demand services increased 0.2 percent. Prices for final demand moved up 1.1 percent for the 12 months ended in May.

In May, the Consumer Price Index for All Urban Consumers increased 0.1 percent, seasonally adjusted, and rose 4.0 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.4 percent in May (‘SA’); up 5.3 percent over the year (‘NSA’).

The Fed has been focused on Core CPI and service inflation. The PPI data showed that while final demand goods fell, services increased. CPI core inflation, year-over-year, is still too high. And today’s Retail Sales data surprised to the upside with a 0.3% increase.

I actually think that the Fed would have preferred to raise rates .25% in June, but, painted itself into a corner with a little too much discussion of whether there would be a pause/skip as the June meeting approached. Not wanting to shock the market, (though they are adamant that the market will not influence their decisions) they held to a skip, with a well telegraphed expectation that July 2023 would be different.

I believe that there will be another rate increase of .25%. at the Fed’s July 25-26th meeting. The Fed does not meet in August. Thus, there will be time for the economy to continue to be impacted by higher interest rates before the next Fed meeting on September 20-21, 2023. Whatever the Fed decides in September, their decision will be based on 60 days of data and a clearer trend of economic performance.

I do believe that when it comes, the final rate hike will be followed by a pause of multiple months. The Fed has done all it can to communicate to the public that it does not want to see-saw on rates. That conservative and prudent streak will be maintained. By its own admission, the error the Fed can swallow is to err on too much tightening, not enough.

Once the pause comes, long term fixed income investments will become less risky. Locking in a healthy yield will be a priority. My strategy will thus be to lean in on longer duration fixed income investments after the July Fed meeting. To what extent, I will decide in July. Right now, I would say 35% at 1-year, 30% at 3-year and 35% at 5-year durations. It may be sometime before I consider 10-year notes.

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// UPDATED ON 29/09
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