With Interest Rates Declining, Are Bonds Worth a Look?

As interest rates begin to decline, many investors are considering whether bonds are worth revisiting as a part of their portfolio. While bonds have traditionally been an attractive choice for conservative investors, the landscape has shifted. Despite the Federal Reserve cutting interest rates, bond yields have been rising—creating confusion and prompting many to reassess the role bonds play in a well-balanced investment strategy. 

The question arises: is it time to switch focus from high-yield savings accounts (HYSAs) to bonds, or is this just another short-term fluctuation?

What’s Happened Recently

In the wake of the Federal Reserve’s recent interest rate cuts, bond yields have behaved contrary to typical expectations. Typically, bond yields fall when interest rates decrease, but they’ve been rising recently. This paradox has been attributed to bond traders who believe the Fed acted too aggressively with its half-point rate cut, signaling that the economic situation may not have warranted such a dramatic response.

According to CNBC, this spike in Treasury yields is a result of bond traders speculating that the Fed’s actions might be overly cautious, driving up yields. These rising yields have put pressure on the stock market, particularly on sectors such as housing, which are closely tied to interest rates. This is an example of “buying the rumor, selling the news,” where market movements over a short period don’t always reflect long-term fundamentals. What happens in the span of a few days or weeks can be irrelevant in the grand scheme, and short-term volatility is often not a reliable indicator of future trends.

Current bond yields at the time of writing include:

• 6-Month Treasury Yield: Almost 4.50%
• 12-Month Treasury Yield: Almost 4.40%
• 2-Year Treasury Yield: Approximately 4.30%
• 5-Year Treasury Yield: Around 4.30%
• 10-Year Treasury Yield: Close to 4.40%
• 30-Year Treasury Yield: Near 4.60%

For the latest bond yield data, visit Bloomberg’s comprehensive market report here.

Worth Noting—Savings Yields Are Still High As Well

Despite the Fed’s interest rate cuts, high-yield savings accounts (HYSAs) continue to offer competitive returns. Even with a lower federal rate, many online banks are still offering rates well above 4%, and it’s expected that these yields will remain attractive into 2025. For conservative investors looking to preserve capital and earn interest with minimal risk, HYSAs provide a safe option to park cash while still earning decent returns. 

Here are some of the top high-yield savings accounts available today:

Marcus by Goldman Sachs 

• Rate: 4.10% APY  
• Highlights: No fees, no minimum balance requirement, and easy online access.

Discover Online Savings

• Rate: 4.00% APY  
• Highlights: No monthly fees and access to over 60,000 ATMs nationwide.

Ally Bank Online Savings

• Rate: 4.00% APY  
• Highlights: No fees, no minimum balance, and access to 24/7 customer service.

American Express High Yield Savings

• Rate: 4.00% APY  
• Highlights: No fees, easy integration with other American Express accounts.

Synchrony Bank High Yield Savings

• Rate: 4.30% APY  
• Highlights: Competitive rates and no minimum deposit.

CIT Bank Savings Builder

• Rate: 4.20% APY  
• Highlights: Earn higher rates by making a monthly deposit or maintaining a higher balance.

While these rates can vary slightly, many of these accounts still offer attractive returns without the risk typically associated with other investments like stocks or bonds. Plus, your funds are FDIC-insured up to $250,000, ensuring safety and security.

Comparing a $10,000 Investment: Bonds vs. High-Yield Savings Account

6-Month Bond

• Yield: ~4.5% (current, subject to market conditions)
• Interest earned: $10,000 × 4.5% ÷ 2 = $225
• Principal after maturity: $10,225

1-Year Bond

• Yield: ~4.4% (current, subject to market conditions)
• Interest earned: $10,000 × 4.4% = $440
• Principal after maturity: $10,440

Synchrony High-Yield Savings Account

• APY: 4.30%
• Interest (6 months): $10,000 × 4.30% ÷ 2 = $215
• Interest (1 year): $10,000 × 4.30% = $430

Key Considerations

• Flexibility: Savings accounts offer liquidity, while bonds require funds to be locked for the term.

• Market Sensitivity: Bond yields can fluctuate, impacting returns. High-yield savings account rates are typically more stable.

Don’t Forget Certificates of Deposit (CDs)—An Extended Runway for Higher Rates

For investors looking to lock in higher rates for a longer period, CDs can be a good option. These deposit accounts offer fixed interest rates in exchange for keeping your money in the account for a set term, typically ranging from 6 months to 5 years.

Pros of CDs:

• Higher interest rates compared to regular savings accounts.
• FDIC-insured up to $250,000, ensuring safety.
• Predictable returns with no market volatility.

Cons of CDs:

• Money is locked for the term, with penalties for early withdrawal.
• Less flexibility compared to high-yield savings accounts.

Current CD Rates and Offerings (as of now):

Marcus by Goldman Sachs

• 1-Year CD: 4.10% APY
• 3-Year CD: 3.65% APY
• 5-Year CD: 3.60% APY

Synchrony Bank

• 1-Year CD: 4.20% APY
• 3-Year CD: 3.90% APY
• 5-Year CD: 4.00% APY

Discover Bank

• 1-Year CD: 4.10% APY
• 3-Year CD: 3.50% APY
• 5-Year CD: 3.40% APY

These rates are subject to change, so be sure to check the specific bank’s website for the most up-to-date information.

Bonds May Be Worth Adding—But Don’t Give Up On HYSA Just Yet

So, does this mean it’s time to abandon high-yield savings accounts and focus entirely on bonds? Not necessarily. While bond yields have increased, making bonds an attractive option for those looking for fixed income, there are still valid reasons to hold onto HYSAs as part of your financial strategy. 

Bonds do offer the potential for higher returns, particularly with the current rise in yields, but they also carry certain risks—especially for those investing in longer-term bonds or corporate bonds, which have varying credit ratings. Bonds can be sensitive to changes in interest rates, inflation, and economic conditions, so their value may fluctuate, which means they are not as risk-free as many investors assume.

However, if you are looking for more predictable returns and a safer, lower-risk option, high-yield savings accounts remain an excellent choice. These accounts provide easy access to your funds and offer more flexibility compared to bonds, which often have longer holding periods. For conservative investors who prefer liquidity, HYSAs remain a valuable tool, even as bond yields rise.

Weighing Your Options

When deciding between bonds and high-yield savings accounts (HYSAs), consider the following:

• Risk tolerance: Bonds come with market risks, including fluctuations in interest rates and inflation. HYSAs are low-risk and FDIC-insured.
• Time horizon: Bonds are often better for long-term investment goals, whereas HYSAs provide liquidity and quick access to funds.
• Interest rates: If you’re looking for higher returns in the short term, high-yield savings accounts may be more attractive.

Bonds Might Be Right For:

• Investors seeking predictable returns and willing to accept some risk.
• Those with a longer investment horizon looking for income through fixed interest payments.

Bonds Might Not Be Right For:

• Investors who prioritize liquidity and flexibility.
• Those unwilling to accept potential losses from market fluctuations.