From June 2017 to June 2018, customers withdrew more than $30 billion from US bank accounts that didn’t earn interest — the first decline in more than a decade.1 Some of that may have been used to fund purchases, but there are also many people who have found more appealing opportunities for their short-term investments, largely thanks to multiple interest rate increases by the Federal Reserve (Fed) since 2015.
From 2008 to 2015, the Fed held the federal funds rate between 0% and 0.25%. When rates were near zero, risk-averse investors often preferred government-insured bank accounts rather than stretching for higher yields with longer-dated or lower-quality bonds. From 2008 to 2017, the Fed reported 10 years of consecutive inflows — totaling over $2 trillion — into bank deposits that earned no interest.2 But after several rate increases over the past few years, the fed funds rate now stands between 2.25% and 2.50%.
At Invesco Unit Trusts, we believe higher rates have created an opportunity for investors in short-term investment grade corporate bonds. Current factors making short-term bonds appealing, in our view, include a compelling rate environment, a flattened yield curve and less interest rate risk.
Reason 1: Higher rates
The Fed’s 3-Year High Quality Market Corporate Bond Spot Rate as of January 2019 was 3.3% which is near the highest level since 2009, as shown in the chart below.
Reason 2: Flattened yield curve
The flattening of the yield curve has reduced the incentive to invest in longer-term bonds. As of Feb. 13, 2019, the 3-year Treasury rate was 2.5% versus the 30-year rate of 3.0%. By comparison, on Feb. 13, 2015, the 3-year Treasury rate was 1.0% versus the 30-year rate of 2.6%.
Reason 3: Less interest rate risk compared to longer bonds
Generally speaking, when rates rise, bond prices fall. However, if the Fed raises interest rates further, short-term bonds should be less impacted than long-term bonds.
Invesco Investment Grade Corporate Trust, 2-4 Year (IGSB)
Interested in the potential benefits of short-term corporate bonds? Talk to your financial advisor about the IGSB unit investment trust (UIT), a diversified portfolio of short-term corporate bonds.
At Invesco Unit Trusts, our process assumes we hold all bond issues to maturity, so investors can take comfort in knowing what bonds provide their monthly payments and, ultimately, the return of principal at the end of the trust. Second, we analyze the fundamentals of each bond, assign an internal credit rating for each bond and stress-test potential investments before adding them to the portfolio. Additionally, our surveillance process provides ongoing assessment of the credit quality for each issuer throughout the life of the trust.
1 Source: MSN.com, “Banks’ golden deposits are heading out the door,” Oct. 23, 2018
2 Source: Federal Deposit Insurance Co.