Where to move your money when interest rates are about to fall

With the Fed on track to cut interest rates next week, the ripple effect will play out in certificates of deposit and high-yield savings accounts, which currently offer rates above 5 percent.

They are not likely to fall dramatically after a rate cut, but rather will be closer to 4% and remain above the rate of inflation for at least next year. Therefore, these accounts should still be your go-to place for your emergency fund or cash set aside for short-term expenses.

That said, the Fed’s anticipated action provides an opportunity to make some money moves that take advantage of the downward trend in interest rates.

“The projected cut can pull the rug out from under high-yield savings rates,” Preston D. Cherry, founder and president of Concurrent Financial Planning, told Yahoo Finance. “Now may be the best time we’ve seen in years to swap cash in high-yield savings for long-term bonds to secure higher income payout yield for lifestyle portfolios and retirement.”

Since 2022, when the Fed started raising short-term interest rates, bank savings accounts have been a better place to park your cash than bonds. That’s set to change.

Read more: What the Fed rate decision means for bank accounts, CDs, loans and credit cards

Bonds are back

It’s a good time to move into bonds for those nearing retirement looking to rebalance their retirement savings amid stock market volatility.

The best way to earn a high total return from a bond or bond fund is to buy it when interest rates are high but about to fall, Cherry said.

If you buy bonds toward the end of a period when rates are rising, you can lock in high coupon yields and enjoy the increase in the market value of your bond once rates begin to fall.

And if you’re a hookup lover, you’re awake. After more than a decade of dismal bond yields, the dual impact of currently high rates and falling inflation offers an opportunity for investment income. When interest rates fall, bond prices will rise. (Interest rates and bond prices move in opposite directions.)

“The addition of lower-priced, higher-yielding long-term bonds at current levels could add total return diversification value to bonds and the overall investment portfolio, which has not been the case in the recent rate-rising environments of past,” Cherry said.

This is a narrow window of opportunity, however, before rates start to fall and bond prices rise.

“If you have adequate liquidity and won’t need to tap the money at a moment’s notice, then locking in bond yields now over a multi-year period can provide a more predictable income stream,” Greg McBride, chief financial analyst at Bankrate .com, Yahoo Finance said.

The story continues

“As the Fed begins to cut interest rates, short-term yields will fall faster than long-term yields in the coming months, so do it for income rather than waiting for capital gains,” he said.

Click here for the latest personal finance news to help you with investing, paying off debt, buying a home, retirement and more

The scale provides a ‘more predictable income stream‘

One way savers can pivot as rates fall is to set up a ladder of staggered maturity bonds or CDs, rather than investing all of the funds in a single fixed-duration CD or bond. This tactic can provide “a more predictable income stream while providing regular access to principal,” McBride said.

I keep my personal savings, for example, in several buckets, including six-month and one-year CDs, a money market account, high-yield savings accounts, and a checking account.

Most of my retirement holdings are stocks and bonds, mainly through broad index funds. How you divide your savings and investments between stocks and bonds, mutual funds and money market funds, or high-yield savings accounts is a balance that only you will know you’re comfortable with, based on your tolerance for risk and how soon you need it. to reach the funds.

Many retirees want a more conservative mix of assets as they age so they don’t experience that sense of uneasiness when the stock market is shaky. That’s why near-retirees and retirees, in particular, who haven’t looked at their asset allocations in a while should consider it.

Read more: CDs vs. bonds: What’s the difference and which one is right for me?

How to put money into bonds for now and for retirement

Most 401(k) investors are in bond mutual funds for the fixed income portion of their portfolios, which are highly diversified and typically invested in intermediate (five-year) high-quality government and corporate bonds.

Most of us do not research and invest in, for example, individual intermediate bonds. If you choose to go it alone and pick individual bonds and hold them to maturity, you have plenty to choose from, of course. Fidelity offers more than 100,000 bonds, including US Treasury, corporate and municipal bonds. Most have medium to high quality credit ratings, but to me the sheer number of options is mind boggling.

So I buy shares of a wide range of individual bonds through a bond mutual fund, or ETF, to add some bond weight to my retirement accounts. The Vanguard Total Bond Market ETF, for example, is a diversified one-stop shop that encompasses more than 11,000 “investment grade” bonds – including government, corporate and international dollar bonds, as well as mortgage and asset-backed bonds. securities – all with maturities greater than one year.

Currently, more than 60% of the Vanguard fund’s total assets are in government bonds, and its year-to-date yield is 4.94%.

As Vanguard notes, this fund “may be better suited for medium- to long-term goals where you’re looking for a reliable income stream and is suitable for diversifying the risks of stocks in a portfolio.”

For shorter-term goals, staying ahead of falling rates is smart to lock in attractive rates for money you might need sooner rather than later.

Cash has “zero risk” of losing face value

Most financial advisers we spoke to did not suggest any sudden action ahead of the Fed meeting. In other words, don’t close your bank accounts.

“Inflation has certainly moderated, but in our view, further substantial decline is unlikely,” said Peter J. Klein, chief investment officer and founder of ALINE Wealth.

If this is the case, the Fed will not continue to cut interest rates, but will keep them steadily moving forward.

“Looking over the long arc of the history of inflation, one can see the changes … leading to persistent and persistent inflationary pressures. So the idea that rates are going to drop substantially — and stay low — is not our base case,” Klein said.

That means those savings you have in an affordable, federally insured bank account that earns above the rate of inflation remain a good bet. This is especially the case for those nearing or close to retirement who plan to use that money for living expenses and don’t want the worry that comes with stock and bond price fluctuations.

“Cash is the only asset an investor can deploy in a portfolio that has zero risk of losing its face value,” Klein added.

Kerry Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including “In Control at 50+: How to Succeed in the New World of Work” and “Never Too Old To Get Rich.” Follow X @kerryhannon.