To combat inflation, the Federal Reserve continues to raise interest rates. While rate increases present challenges for all borrowers, it provides companies with an exceptional opportunity to receive higher yields from safer assets. In other words, less risk for the same reward.
When interest rates were at 0%, companies with liquidity to spare could get yields at 3-4% by investing in riskier assets, such as equities and lower-quality bonds. With rising interest rates, now they can find the same yields, or higher, investing in safer assets: Treasury bills, high-quality corporate bonds, or bank money market and CD rates.
Companies with at least $500,000 in excess liquidity are best positioned to take advantage of the increase in interest rates.
Here are several key opportunities worth exploring to enhance your investment strategy.
Laddering Various U.S. Treasury Maturities
U.S. Treasury bonds are among the safest and most liquid investments available, and under current conditions, yields are notably higher with some exceeding 4%. Laddering multiple maturities together—for instance, buying a 30, 60, and 90-day bond simultaneously—can lead to constantly maturing investments every month. Companies can use these yields to help fund repurchase obligations or reinvest in potentially higher-yielding bonds as rates rise. It is also important to note that income from US Treasuries is not subject to state income taxes, further pushing up the yield in high tax states.
Laddering High-Quality Corporate Bonds
Just as you can get reliable yields from Treasury bonds, blue chip corporate bonds offer the potential for higher returns as well. When compared to Treasury bonds, corporate bonds offer higher yields, though without the backing of the U.S. government. Fundamentally, the strategy remains the same: construct a ladder of bonds utilizing multiple maturities over whatever timeframe is most appropriate and have regularly maturing bonds which can be used for repurchase obligations or reinvested in potentially higher-yielding bonds at a future date.
This option presents the best of both worlds: a portfolio of high-yielding stocks and a steady source of reliable returns through investment grade bonds. Combining dividend paying stocks from large, stable companies with a fixed income portfolio can offer higher returns, especially while interest rates are elevated. And, by including a diversified portfolio of stocks you may also benefit from any potential price appreciation.
Regular Bank Deposits, CDs, and Overnight Money Market Sweep
This option requires opening an account with an FDIC-insured institution (like First American Bank). For a sweep, when funds in the account exceed its threshold, the excess money transfers into a secondary account with a higher interest rate. This option has begun to show a sharp improvement in yields—in some cases, more than 2% for a sweep or a CD with a set term. It is a simple, straightforward approach, and you can implement it almost immediately.
How First American Bank can help
At First American Bank, we have extensive experience in working with companies to manage their portfolios and maximize returns while balancing risk to protect hard-earned assets. Our Wealth Management Group and Business Specialists can provide investment options and customized business solutions to ensure you are taking advantage of higher interest rates and the ever-changing economic environment allowing you to meet short- and long-term goals.
Improve the yield of your idle liquidity. Let’s talk.
First American Bank is a privately held, full-service bank with international expertise. With almost 50 years of experience and 61 locations across Florida, Illinois, and Wisconsin, we aim to create custom solutions, deliver exceptional customer service and provide unmatched expertise in commercial banking, wealth advisory, and personal finance solutions.
Disclosure: First American Bank investment products are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value.