With the national default deadline looming, the federal government reached an agreement to raise the debt ceiling.
The economy’s resilience and uncertainty surrounding the debt ceiling negotiations caused mortgage rates to climb, according to Freddie Mac Chief Economist Sam Khater.
Many homeowners and potential home buyers hope this means lower interest rates as we head into summer. Read on to learn more about the debt ceiling and its impact on the housing market and mortgage rates.
What is the debt ceiling?
Also known as the debt limit, the debt ceiling represents the maximum amount of money that the United States Treasury can borrow to pay the nation’s bills.
The U.S. hit its current borrowing limit of $31.4 trillion in January. That means the federal government cannot currently increase the amount of its outstanding debt, and paying the nation’s bills becomes more complicated.
In a letter to Congress, Treasury Secretary Janet Yellen said the U.S. could be incapable of paying its debt as early as June 1. If so, the federal government is at risk of defaulting for the first time in U.S. history.
She goes on to say the U.S. defaulting on its bills could cause “irreparable harm” to the U.S. economy. Interest rates on credit cards, auto loans and mortgage rates could skyrocket.
By increasing the debt ceiling, the Treasury can borrow funds to pay for government obligations, such as Social Security and Medicare benefits, tax refunds, military salaries, and interest payments on national debt.
What is the relationship between the debt ceiling and mortgage rates?
Although the debt ceiling itself doesn’t directly determine mortgage rates, its impact on the overall economy could wreak havoc on rates. The potential consequences and uncertainty associated with reaching the debt ceiling could impact investor confidence and lead to changes in interest rates, including mortgage rates.
“The debt ceiling debate can have a direct impact on the economy and mortgage rates. Continued delays will lead to increased uncertainty and result in upward pressure on mortgage rates,” said Shane Spink, regional manager for Acopia Home Loans.
What happens to mortgage rates if the debt ceiling is raised?
With a resolution reached and the debt ceiling raised, things should mostly return to normal. The U.S. never hit the ceiling before — although it’s gotten close in a few instances and those came with minor economic repercussions.
With the fear of a default removed and stability reestablished, consumer confidence will likely be restored and interest rates should slowly start coming down over the next 60 days.
What happens if the federal government does not raise the debt ceiling?
Not raising the debt ceiling could lead to dire consequences for the U.S. economy.
If the debt ceiling isn’t raised in time, the added uncertainty in our nation’s economy could negatively affect financial markets and interest rates across many sectors, including mortgage rates. This is because a debt default would force the Treasury Department to pay higher interest on its bonds to convince investors to stay the course.
Mortgage rates typically move in lockstep with yields on 10-year Treasury notes. Unless Congress moves quickly, yields could rise as the demand for Treasury notes could temporarily halt if investors worry that Treasuries are now a risky investment. Additionally, bondholders could seek higher rates to balance the increased exposure.
In either of these scenarios, rising yields could push mortgage rates higher. Higher mortgage rates can have several effects on the housing market and potential homebuyers.
First, higher rates increase the cost of borrowing, making mortgages less affordable for many buyers. This could also reduce overall demand for homes and potentially slow down an already struggling housing market.
Second, higher mortgage rates can impact the ability for existing homeowners to refinance their mortgages. When rates rise, refinancing becomes less popular, as the potential savings from refinancing decrease. This can impact a homeowner’s ability to access lower rates and potentially reduce their monthly mortgage payments.
Higher mortgage rates can also result in a ripple effect within other sectors of the economy. The housing market is deeply linked to a number of industries, such as construction, real estate and home improvement. Slower housing activity due to higher rates can dampen all these sectors, leading to job loss and decreased economic growth.
What happens to the housing market if US defaults on debt?
Any default, whether its short-lived or a lengthy road to recovery, could trigger a recession. The potential for job loss is massive, leading to an interruption in income for millions of Americans.
Consumers and workers could be hurt almost immediately as the federal government may be forced to cut back benefits and paychecks. As interest rates rise, so do borrowing costs. Rising rates in addition to withheld paychecks, could seriously impact housing, both in the short-term and long-term.
Investor sentiment would be impacted negatively, as it raises concerns about the government’s ability to repay its debts.
Not only would it add to an already struggling housing market that’s suffering from a lack of inventory and rising mortgage rates, getting a mortgage loan would become even more challenging. Small businesses would also struggle as getting a small business loan would become more difficult.
“We are already seeing what higher rates are doing to the overall housing market,” Spink says. “If the debt ceiling isn’t raised in time, this could be an unnecessary addition to already higher rates in a time where we would typically see accelerated applications during peak summer months”.
The bottom line
The debt ceiling has long been a contentious issue in the United States, with debates and political battles often becoming a major topic when the government nears its borrowing limit.
Whenever the risk of defaulting on the nation’s debt looms over the U.S economy, it’s important to keep a close eye on the debt ceiling debate, as well as its potential effect on mortgage rates and the housing market.
Whether you’re considering a new home purchase or a refinance, mortgage borrowers should speak with a lender about the available options for locking in a favorable rate prior to a potentially drastic jump in interest rates.
In the world of personal finance, offshore bank accounts have long been a source of intrigue, often associated with high-net-worth individuals, multinational corporations, and even cinematic tales of mystery and suspense.
However, they’re not just tools for the James Bonds of the world. From asset protection to currency diversification, offshore bank accounts can offer a wide range of benefits.
What is offshore banking?
Offshore banking refers to the process of keeping money in a financial institution located outside the depositor’s home country. This foreign financial institution could be in a country halfway across the world or in a neighboring nation, depending on the account holder’s needs and preferences.
Despite the name, an offshore bank account functions much like your local bank account, providing similar services such as savings accounts, debit cards, credit cards, and online banking.
How to Open an Offshore Bank Account Legally
Opening an offshore bank account can be a relatively straightforward process, albeit with more documentation involved than opening a domestic account. To open a foreign bank account, you need to conduct research on countries that offer offshore banking services and the offshore banks that operate within these jurisdictions.
Typically, the account opening process involves providing your identification documents, proof of address, and, in some cases, proof of income or wealth, to the foreign bank. Some foreign banks may also request a bank reference, which usually comes in the form of bank statements from your current bank.
Advantages of Offshore Banking
When considering an offshore bank account, it’s essential to weigh the potential advantages it offers. These benefits can be quite compelling, depending on your specific financial situation and needs.
Asset Protection
One significant advantage of offshore banking is asset protection. This benefit is of particular interest to high-net-worth individuals and business owners, but it can be equally beneficial for anyone interested in safeguarding their assets from legal disputes or economic instability.
Offshore bank accounts can serve as a secure and central location for assets. By keeping part of your wealth in a jurisdiction other than your home country, you’re diversifying the risks associated with potential economic downturns or changes in governmental policies. For instance, if your domestic economy takes a downturn, having a portion of your assets abroad could provide a financial buffer.
Moreover, certain offshore accounts offer a level of legal protection, potentially shielding your assets from legal proceedings such as lawsuits or bankruptcy filings.
Currency Diversification
Currency diversification is another advantage of offshore bank accounts. When you hold money in an offshore bank account, you’re not restricted to a single currency. Instead, you can hold deposits in multiple currencies, providing a hedge against currency risk.
For example, if your home country’s currency significantly depreciates, it could lead to a relative decrease in your wealth. However, if you hold funds in other currencies through your offshore account, you might be shielded from this depreciation. This multi-currency feature can also be beneficial for frequent travelers or individuals conducting business across different countries.
Tax Benefits
Lastly, it’s worth noting the potential tax advantages of offshore banking. Certain offshore banks are located in tax havens, or countries known for their low or no taxes on certain types of income. These jurisdictions might offer favorable tax conditions compared to your home country.
While these potential tax benefits should never be used to avoid paying taxes unlawfully, they can be part of an effective wealth management strategy when used correctly. For instance, some offshore jurisdictions don’t tax interest income, which could be beneficial for those with a substantial amount of money in their savings or investment accounts.
It’s important to always disclose these accounts and income to your home country’s tax authority, to stay in compliance with all tax laws.
Disadvantages of Offshore Banking
While offshore bank accounts can offer several benefits, they also come with challenges that potential account holders need to be aware of.
Cost
Some of the best offshore bank accounts are often associated with various costs. To start, there might be a substantial minimum deposit requirement. This can put some of the more premium offshore accounts out of reach for individuals without a high level of wealth.
Furthermore, offshore banking can involve monthly maintenance fees and transaction fees that are often higher than those of a domestic bank. These fees can add up over time, potentially eroding the benefits gained from lower taxes or higher interest rates.
Accessibility
Physical and technological accessibility can be a concern when banking offshore. Depending on the location of the bank, accessing your funds when you need them can be more challenging than with a domestic account. For instance, differences in time zones can make real-time banking difficult, and language barriers could potentially complicate communication with customer service.
Regulation and Stability
Lastly, not all countries that offer offshore banking have the same level of political and economic stability. While places like the Cayman Islands and Switzerland are known for their stability, this is not a universal trait among all jurisdictions offering offshore accounts.
Moreover, the level of consumer protection offered by offshore banks may not be as comprehensive as what you would find in your home country. For instance, some countries might lack deposit insurance schemes, leaving your funds vulnerable if the bank were to fail.
The Legal Landscape of Offshore Accounts
While offshore bank accounts have unfortunately been linked to money laundering and tax evasion, it’s essential to underscore that having an offshore account is completely legal. However, account holders must adhere to tax laws and regulations in their home country, and not use these accounts for illegal purposes.
This includes reporting your offshore accounts to the relevant tax authorities and paying any taxes owed on interest or other income earned from these accounts. Failure to do so could lead to severe penalties, including charges of tax fraud.
The Role of Offshore Banking in Investment and Savings
Offshore banking can also be an effective tool for managing your savings and investments. Many offshore banks offer a variety of financial services, including investment accounts and high-yield savings accounts, allowing individuals to invest money in a range of assets across different markets.
This makes offshore banking particularly appealing to expatriates, international businesspeople, and globe-trotters, as it provides a level of flexibility that is often unmatched by domestic accounts. However, it’s important to note that these potential benefits should always be balanced against any associated costs, such as monthly fees or transaction charges.
Myths and Misconceptions About Offshore Banking
Offshore banking is often misunderstood, thanks to a slew of myths and misconceptions. The truth is, you don’t have to be a billionaire or an international spy to open an offshore bank account. Many people, from expatriates to retirees, can benefit from foreign currency holdings, potential tax benefits, and other financial advantages that come with having an account with a foreign bank.
Bottom Line: Is Offshore Banking Right for You?
Offshore banking can offer a host of benefits, from asset protection to potential tax advantages. However, it’s not a decision to be taken lightly. It’s crucial to understand the legal implications, costs, and potential risks before deciding to bank offshore.
Whether to open an offshore bank account will largely depend on your individual circumstances. If you’re considering banking offshore, it’s always a good idea to consult with a financial advisor or tax professional to understand all the implications.
After all, navigating the world of offshore accounts can be tricky, but with the right guidance and knowledge, you can make an informed decision that aligns with your financial goals.
Frequently Asked Questions
Can I open an offshore bank account online?
Yes, many offshore banks offer the option to open an account online, but the process can vary depending on the bank. Some banks may require a notarized copy of your passport, proof of address, and a reference from your current bank. Others may need more or less, depending on their internal policies and the regulations of the country where they’re located.
Can U.S. citizens open offshore bank accounts?
Yes, U.S. citizens can legally open an offshore bank account. However, it’s important to note that U.S. citizens must report these accounts to the IRS and the U.S. Treasury Department if the total value of their foreign financial accounts exceeds a certain threshold.
How can I access the money in my offshore account?
There are several ways to access your money in an offshore account. You can use a debit or credit card issued by your offshore bank, make electronic transfers, or write checks. The exact methods will depend on the services your offshore bank provides.
What happens to my offshore account if I die?
In the event of your death, your offshore account would be handled based on the local laws of the country where the bank is located and any instructions you may have left with the bank. Some offshore jurisdictions are notoriously complex when it comes to probate laws, so it’s essential to discuss this aspect with your bank when opening an account.
Can I open an offshore account anonymously?
While some offshore jurisdictions used to allow anonymous accounts, this is no longer the case due to global efforts to increase transparency and fight against illicit activities like money laundering and tax evasion. Today, every bank is required to know its customers (KYC regulations) and will need your personal information when you open an account.
Can offshore banking help with my retirement planning?
Yes, offshore banking can be a part of your retirement planning, especially if you plan to retire abroad or travel frequently during your retirement. Some offshore banks offer specific services for retirees, including access to medical insurance and investment products.
A former employee of nonbank mortgage lender The Change Company, has filed a lawsuit alleging the company founded by former banker Steve Sugarman has mischaracterized home loans in certifications to the Treasury Department.
The lawsuit, filed Tuesday in Superior Court in Orange County, California, was brought by Adam Levine, CEO Sugarman’s former chief of staff. Levine is a former vice president at Goldman Sachs and former assistant White House press secretary in the George W. Bush administration. Before his stint in the White House, he had been a senior aide to Sen. Daniel Patrick Moynihan.
The lawsuit seeks damages for alleged wrongful termination, whistleblower retaliation and breach of contract. It also alleges that Change Co., a community development financial institution based in Anaheim, California that originates loans to minority and low-income communities, has made false representations to investors about the underlying characteristics of the mortgages it securitizes.
The lawsuit states that Levine reached out in March to Change Co. Chairman Antonio Villaraigosa, a former mayor of Los Angeles, and asked for an independent investigation into certain practices and issues at the company. When Levine “reported his concerns to government regulatory authorities,” he was terminated, the lawsuit states.
Alan Wayne Lindeke, Change Co.’s chief legal officer and general counsel, called the lawsuit “without merit.”
“Multiple third-party diligence firms have verified the accuracy of Change Lending’s Target Market data and the corresponding assessment methodology has been verified by outside counsel,” Lindeke said in an emailed statement.
David Lizerbram, a lawyer in San Diego who represents Levine, declined to comment.
Sugarman served as Chairman and CEO of Banc of California before resigning in 2017. He formed a new company focused on originating loans to borrowers with non-traditional credit needs.
In 2018, Change Co. was certified by the Treasury Department as a community financial development institution. CDFIs are government-certified lenders with a mission to provide financing to disadvantaged communities. Because they provide credit and financial services to underserved Black, Hispanic and low-income communities, they are exempt from certain mortgage regulations.
Specifically, CDFIs do not have to abide by the Consumer Financial Protection Bureau’s ability-to-repay rule, which requires that mortgage lenders document a borrower’s income, assets, employment and credit history. Those so-called qualified mortgage rules were put in place after the subprime mortgage crisis in an effort to prevent a reprise of the low-documentation and no-documentation loans that were rampant before 2008.
Change Co. states on its website: “Our regulatory certification enables us to serve prime, creditworthy borrowers who struggle with burdensome documentation requirements.”
In just five years, Change Co. has catapulted ahead of competitors largely because, as a CDFI, it is not bound by traditional underwriting requirements. This year, Scotsman Guide, which ranks mortgage lenders by size, ranked Change as the largest non-qualified mortgage lender in the U.S. with $4.2 billion in lending volume.
The company lends to people “with unpredictable or hard-to-document income,” but looks for compensating factors such as loan-to-value ratios below 80%, Change Co says on its website. Its borrowers have FICO scores above 640 and typically have more than a year’s worth of cash reserves to bridge gaps between paychecks, the website states.
All CDFIs have to demonstrate that they are serving at least one eligible target market — either a specific area or targeted population. They are required to provide annual certification and data collection reporting to the Treasury Department, attesting that 60% of their loans, both in number and dollar volume, are made to target markets.
In the lawsuit, Levine claims that he has documentation showing that the company is “mischaracterizing the race, ethnicity, and income level of borrowers,” and that it “falsifies information on its annual certification by mischaracterizing its loans.”
CDFIs represent a regulatory tradeoff. They are exempt from some government requirements to collect borrowers’ income documentation, which can be difficult for both the lender and the customer and can eliminate the ability to serve borrowers who don’t have a stable job or whose income comes from a business they own.
A company that wasn’t bound by these underwriting restrictions could shoot ahead of peers that were subject to the rules, so to compensate, CDFIs are required to restrict the majority of their lending to demographic groups considered underserved. If a CDFI was not following the rules and sticking to its target population, it would essentially operate as an untrammeled lender while its competitors were tied to stricter underwriting regulations.
Mortgage lenders typically bundle their loans and resell them to investors as residential mortgage-backed securities. The lawsuit alleges that Change Co. “makes false representations” to the buyers of its mortgage-backed securities “by mischaracterizing the underlying loans.”
“These misrepresentations are material, as many investors choose CDFI securitized products as part of a broader policy that promotes socially responsible investing,” the lawsuit states. “For example, investors who believe they were supporting loans to low-income members of the community would not choose to purchase a [Change Co.] security if they knew that the company falsely characterized its loans to wealthy individuals and even celebrities as low-income loans.”
Change Co. and its subsidiary Change Lending closed a $307 million securitization of home loans in June. The company said at the time that since becoming a CDFI five years ago, it has funded over $25 billion in loans to more than 75,000 families.
Warehouse, Appraisal, Non-QM, RON Products; Reverse Mortgages: Catch the Wave; Mortgage Apps Continue Decline
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Warehouse, Appraisal, Non-QM, RON Products; Reverse Mortgages: Catch the Wave; Mortgage Apps Continue Decline
By: Rob Chrisman
3 Hours, 24 Min ago
A biologist, a chemist, and a statistician are out hunting. The biologist shoots at a deer and misses five feet to the left. The chemist takes a shot and misses five feet to the right. The statistician yells, “We got ’em!” Are you selling your house? Me neither. Few people are: there are only about 564,000 active listings. That’s about 11,000 per state. In California, where there are 58 counties, that is an average of less than 200 per county. In Wyoming, the least populated state, there are 58 counties so that’s 190 listings per county. Of course, averages don’t apply like that, but it is important to keep things in perspective, and the overarching issue is a continued lack of supply and a strong demand impacting prices, affordability, and sales numbers. Can lighthouses help? Since 2000 about 150 lighthouses have been transferred to new owners, about 80 given away at no cost to agencies, nonprofits or educational organizations willing to maintain them, and about 70 auctioned off for a total $10 million so far. This year, six lighthouses are up for offer. (Today’s podcast can be found here and this week’s is sponsored by Lenders One, one of the largest mortgage co-ops in the country with a diverse mix of 250+ member companies and providers of an end-to-end solution independent mortgage professionals trust to drive profitability and growth. Listen to an interview with Verisk’s Kingsley Greenland on climate risk, stress testing, catastrophe modeling, and macroeconomic policy.)
Lender and Broker Products, Software, and Services
“Have you found yourself digging through loan files to find price concession records while an auditor awaits? Have you ever wondered if your margin is better or worse than your peers? Have you been looking for a way to track how competitive your pricing is, in real time? Optimal Blue, a division of Black Knight, offers data and analytics tools that provide this actionable business intelligence, and more! Our granular rate lock data provides key insights into your business, as well as benchmarking against 42% of all rate lock activity. Reach out to Optimal Blue now to learn how our data and analytics platform can help you develop smarter, more profitable pricing strategies!”
Beer – it’s not just for drinking anymore. In fact, beer is just one of many everyday items with multiple uses that would surprise you. Want another? Remote online notarization (RON) isn’t just for originations anymore. Recently, servicers have discovered the benefits of using RON for loan modifications, partial claims and even assumptions. On average, servicers reduced the average cycle time from 21 days down to 7 days. While we all know that time is money, the reduction in cycle time and carry costs resulted in a savings of about $500 per loan. In today’s environment where we all need to find savings to help improve our margins this is an easy way to get there. Email Suzanne Singer or stop by NotaryCam’s booth 22 at NS3 in St. Louis next week to learn more about the many uses of RON.
“No one does Non-QM like Newfi Wholesale! Our newly expanded Non-QM product suite offers 90% LTV up to $1.5M, loan amounts up to $4M, 2-1 buydowns, DSCR (no minimum ratio) 1-8 units, and alt-doc solutions that make sense for your borrowers. Most of all, we have a passion to close deals and about 1/3 of all of our funded Non-QM deals have common-sense exceptions! In the words of one of the brokers who work with us: “Looking for an amazing Non-QM lender? Newfi is your go-to lender.” We offer industry-leading Non-QM pricing, technology, and product innovation. For more information contact SVP, Non-QM Development & Strategy Dan Bayer or 925-584-0579.”
Tired of slow, low-quality appraisals? Try The Appraisal Marketplace. The Marketplace allows you to fulfill appraisal orders directly from your LOS, without relying on an AMC or managing a panel. Even better, by leveraging real-time appraiser performance data, its “Uber-style” algorithm matches every order with the appraiser that’s truly right for the job. This gives you the fastest turn times, lowest revision rates & lowest fee escalation rates in the industry. Seriously. Learn more.
“CWDL is committed to empowering our clients and friends with mortgage industry-specific education and insights, even when it’s outside of our core focus on audit, accounting, and tax. So, when our clients mentioned they’d like to better understand the perspectives of warehouse bankers and how they evaluate lenders, we organized a panel of industry veterans to share their insights. Join us for our webinar on June 15 to “Meet the Warehouse Bankers,” as we discuss such topics as when and how to best communicate with your warehouse partners; how warehouse banks evaluate counterparty risk in their clients; what lenders should consider or plan for regarding M&A, a winddown or facility consolidation; and much more. This webinar is free and open to all lenders who are looking for more insight into their warehouse relationships. To register, contact Kasey English.”
Agencies, Investors, Lenders, and Reverse Mortgage Biz
The last time I saw a stat, 10,000 people a day were turning 62. And a lot of them have equity in their houses. The National Reverse Mortgage Lenders Association points out that, “Homeowners 62 and older saw their housing wealth grow by 1.95 percent or $226 billion in the third quarter to a record $11.81 trillion from Q2 2022, according to the latest quarterly release of the NRMLA/RiskSpan Reverse Mortgage Market Index… The increase in older homeowners’ wealth was mainly driven by an estimated 1.95 percent or $268 billion increase in home values, offset by a 1.93 percent or $42 billion increase in senior-held mortgage debt.” So, if you’re looking for a growth business…
Need a Pre-Qual? Plaza’s Reverse Mortgage staff will run a complete analysis of your submitted information and send the findings back to you via e-mail, typically within a few hours. The analysis details available funds, interest rates, fees, and other loan information.
Plaza Home Mortgage posted Video Marketing to Seniors. And brokers can use Plaza’s Reverse Calculator to run scenarios and you’ll quickly and easily see how much borrowers could receive, no personal information required.
Fairway Independent Mortgage Corporation has had a reverse division for many years and has seen continued growth.
CrossCountry Mortgage (CCM) announced that it is expanding its reverse mortgage division by making additional investments, resulting in what it calls “enhancements.” “Borrowers heading into retirement are seeking solutions that will benefit their future. CCM’s newly established Reverse One Team offers a specialized network of advisors and tools for loan officers to become certified specialists in originating reverse mortgage loans.”
Reverse training and certification programs among “forward” lenders are increasing. Fairway Independent Mortgage Corp. and Guaranteed Rate, for example, offer pathways within their organizations for forward professionals to become certified in reverse mortgages. Broker shops including C2 Financial also maintain a reverse training and certification program.
PHH Mortgage delivers for the entire mortgage lifecycle: non-delegated, best efforts, mandatory, bulk MSR, and reverse.
While bringing more forward specialists up-to-speed with reverse origination practices can certainly help to expand an LOs or lender’s business, it is well known that anyone interested in the business must be aware of some of the specific differences inherent in originating the product when compared with more traditional, forward mortgage options. And a solid month, volume-wise, might only be one or two loans.
Anyone interested should check out Reverse Mortgage Daily, and think about the use of video in their marketing and consulting with client’s families. “Homeowners aged 55 and over increasingly embrace online video as one of their preferred ways to research and discover information…68% of Baby Boomers use YouTube to watch videos. Half of them watch videos more than once per week, and they’re watching news, educational content, and DIY tutorials.”
Capital Markets: Housing Prices Ramping Up
The bad news is that mortgage applications continue to falter. The good news is that we finally had a little rally yesterday as bond markets responded to weekend news that President Biden and House Speaker McCarthy reached an agreement to raise the debt ceiling. Rates had risen of late as fears of a U.S. default gained momentum. A default would force the Treasury Department to pay higher interest on its bonds to convince investors to stick around, with mortgage rates and other borrowing costs tending to follow Treasury rates.
In Federal Reserve news, New York Fed President Williams discussed inflation, the labor market, and the importance of price stability yesterday by saying, “Inflation remains too high, and high inflation is hardest on those who can least afford to pay higher prices for food, shelter, and transportation.” He explained that the U.S. is seeing signs of a gradual cooling in the labor market, along with a rebound in labor force participation. Still, unemployment nationally remains historically low, at 3.4 percent.
The first trading day of a shortened week was headlined by house price indexes. The FHFA Housing Price Index was up 0.6 percent in March after increasing a revised 0.7 percent in February. The index was up 4.3 percent year-over-year, with prices in many western states starting to decline for the first time in over ten years. The fastest growing states were South Carolina, North Carolina, Maine, Vermont, and Arkansas. The declining states included Utah, Nevada, California, Washington, and D.C. Separately, the Case-Shiller home price index rose 0.7 percent in March, suggesting that the decline in home prices that began in June 2022 may have come to an end. The S&P Case-Shiller 20-city Home Price Index was down 1.1 percent in March with big declines out West, and the Southeast remaining the country’s strongest region.
Today’s calendar kicked off with the usual mortgage applications from the MBA for the week ending May 26. Mortgage applications decreased 3.7 percent from one week earlier, with activity expected to decline again following last week’s increase in yields amid increasing odds of a 25 basis points hike at the June FOMC meeting. During the reporting period, 30-year mortgage rates hit new highs for the year and their highest since last November.
Later this morning brings Chicago PMI for May, Job openings from JOLTS for April, and Dallas Fed Texas services for May. Four Fed speakers are scheduled: Boston President Collins, Governor Bowman, Governor Jefferson, and Philadelphia President Harker. The latest Beige Book will be released in the afternoon ahead of the June 13/14 FOMC meeting. The rest of the week will be dominated by the jobs report on Friday, the last jobs report before the mid-June FOMC meeting. Fed funds futures currently see a 60 percent chance for another 25-basis point hike. We begin the day with Agency MBS prices better by .125-.250 and the 10-year yielding 3.65 after closing yesterday at 3.70 percent; 4.40 percent on the 2-year.
Employment and Transitions
“Are you an account executive looking to change it up!? Why not Kind Lending!? At Kind, our family of diverse and talented Kind Ambassadors are the driving force behind our new approach to the mortgage experience. We are focused on serving the broker community and their borrowers by providing an array of products, top-notch service by experienced and friendly professionals and superior resources to support their business model. Founded by Glenn Stearns in 2020, Kind Lending is one of the fastest growing mortgage lenders in the country, building partnerships with our customers, who ultimately become family and our reason why. At the heart of it all, our people believe kindness matters and a client’s positive experience is everything. Come grow with us! Contact Delfino Aguilar, SVP TPO Production (619.726.0377).”
Earlier this month Freddie Mac (OTCQB: FMCC) announced the winners of its Home Possible RISE Awards®. The annual program, RISE (Recognizing Individuals for Sustained Excellence), salutes Freddie Mac’s top clients across multiple categories for excellence with the Home Possible® mortgage, Freddie Mac’s affordable lending solution for very low- to low-income homebuyers. Hallmark Home Mortgage earned the Home Possible RISE Award for Greatest Volume. “I’m thrilled and honored that Hallmark Home Mortgage has been recognized with the Freddie Mac Home Possible Rise Award for the Greatest Volume in the Corporate Segment. This award is a testament to the hard work and dedication of our entire team, and we are incredibly proud of this achievement,” noted Deborah Sturges, CEO & Founder Hallmark Home Mortgage.
Evergreen Home Loans™ adds to its awards line up. This year, the company placed on the Puget Sound Business Journal Corporate Philanthropy List for the third year in a row. It honors the region’s corporate philanthropists and companies who have made significant contributions to the community through philanthropic work. “We are committed to making a meaningful impact in our local communities,” said Don Burton, Founder and CEO of Evergreen Home Loans. “And we are humbled by the recognition for this award.” As loan officers, you already positively impact lives and communities… Continue to do so with a company that helps associates give back, provides paid hours for volunteer work, celebrates individual growth, and truly lives its unique and award-winning culture. Visit the Evergreen careers page to explore current opportunities.
Are you a loan officer or mortgage banker frustrated with the constraints of retail lending? Tired of competing against lower rates, fees and closing costs? Then now’s the time to take control of your pipeline and career by making the switch to wholesale lending as an independent mortgage broker. Whether you’re looking to open your own brokerage or join a team as a loan officer, you can get up and running without missing a beat with support from the team at BeAMortgageBroker.com. You have nothing to lose and only clients, greater flexibility and compensation to gain.
loanDepot, Inc. has promoted Alec Hanson to serve as its chief marketing officer (CMO). Hanson will “lead a consolidated marketing team, overseeing the development of brand, digital marketing, and organic and digital lead generation campaigns that drive awareness and revenue growth while differentiating loanDepot’s marketing engine as a competitive advantage for loan originators. Hanson will also be responsible for the company’s originator-led field-level marketing capabilities.”
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At long last, the White House and House Republicans have reached a tentative agreement to raise the debt ceiling. But a deal isn’t over yet: Congress still needs to vote on the deal – far from a guaranteed outcome – and President Joe Biden would need to sign it before the US defaults or misses a scheduled payment.Video above: House Speaker Kevin McCarthy speaks after debt ceiling agreement in principleEvery day that passes without a bill to raise the debt ceiling, the probability of the United States reaching the critical date that it can no longer meet its financial obligations steadily grows.If lawmakers fail to pass the tentative agreement, and they don’t raise the country’s debt limit by early June, the government may confront an unprecedented challenge: determining which bills to prioritize for payment as the Treasury Department grapples with insufficient funds. Debt vs. other payments If the United States doesn’t raise the debt ceiling in time, the Treasury may have to decide whether to make interest payments to its debtholders or to pay its non-debt obligations, such as Social Security, veterans’ benefits, unemployment insurance, food stamps, and running government organizations like the military and the US Centers for Disease Control.The United States government makes millions of payments each day, but the overall economy would pay a far greater price if it were to miss payments on its debt, according to Mark Zandi, the chief economist at Moody’s Analytics. Moody’s Analytics is separate from Moody’s Investor Service, the credit rating agency.If the United States defaults on its debt, it would undermine faith in the federal government’s ability to pay all its bills on time, affecting the government’s credit rating and unleashing massive turbulence in financial markets.Countries with lower credit ratings face higher interest rate costs than those that are viewed as more trustworthy borrowers. The three largest credit rating agencies – Moody’s Investor Service, S&P Global Ratings, and Fitch Ratings – rate borrowers based on their perceived ability to pay back debt. If America’s credit rating were downgraded, that could raise borrowing costs for millions of Americans, sending mortgage, personal loan and credit card rates higher. It could make business’ borrowing costs rise and lead to layoffs – and ultimately a recession.What gets prioritized?Absent a bill passed by Congress and signed by Biden, Treasury will likely do everything in its power to avoid a debt default.In contrast to debt payments, government payments like Social Security or federal worker salaries aren’t considered debt instruments, so they are less likely to come into play when the agencies rate the United States’ debt. Zandi acknowledged that a government decision to pay back bondholders, including foreign governments like China and Japan, over an elderly Social Security recipient will likely be politically unpopular. However, he believes the government would try to prevent a debt default for as long as it can. “The reality is, if they don’t do that, then the economy is going to evaporate, the budget deficits are going to explode, and our interest expense is going to rise because investors are going to demand higher rates,” Zandi said.“A grandmother 10 to 20 years from now looking for a Social Security check will be much less likely to get one. At least not one as large because we’ll be in a much more precarious financial situation.”Treasury Secretary Janet Yellen, however, has not said what the Treasury Department would do if the country hits the so-called X-date, when the government can no longer meet all its obligations. In March, she called prioritizing payments “effectively a default by just another name.”Treasury will not be able to make everyone happyOn Friday, Yellen updated her estimate of the X-date, to June 5.Though prioritizing debt payments might stave off an even-greater economic collapse, the United States may not emerge unscathed.In 2011, then-Treasury Secretary Tim Geithner compared the government picking and choosing which bills to pay to a homeowner who pays their mortgage while pushing off their car loan and credit card bills: while that key housing expense is taken care of, that person would likely still have damaged credit.Betsey Stevenson, a professor of economics and public policy at the University of Michigan, said no matter which payments Treasury decides to put first, the agency will likely be sued by those left behind. “What should Treasury do? Should it issue new debt it’s not authorized to issue? Should it fail to pay a bill it’s required to pay? Should it fail to honor the debt that the US government has issued? There is no clear legal answer,” she said.“Treasury doesn’t really want to answer that question, and they don’t really want to be in that position.”
At long last, the White House and House Republicans have reached a tentative agreement to raise the debt ceiling. But a deal isn’t over yet: Congress still needs to vote on the deal – far from a guaranteed outcome – and President Joe Biden would need to sign it before the US defaults or misses a scheduled payment.
Video above: House Speaker Kevin McCarthy speaks after debt ceiling agreement in principle
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Every day that passes without a bill to raise the debt ceiling, the probability of the United States reaching the critical date that it can no longer meet its financial obligations steadily grows.
If lawmakers fail to pass the tentative agreement, and they don’t raise the country’s debt limit by early June, the government may confront an unprecedented challenge: determining which bills to prioritize for payment as the Treasury Department grapples with insufficient funds.
Debt vs. other payments
If the United States doesn’t raise the debt ceiling in time, the Treasury may have to decide whether to make interest payments to its debtholders or to pay its non-debt obligations, such as Social Security, veterans’ benefits, unemployment insurance, food stamps, and running government organizations like the military and the US Centers for Disease Control.
The United States government makes millions of payments each day, but the overall economy would pay a far greater price if it were to miss payments on its debt, according to Mark Zandi, the chief economist at Moody’s Analytics. Moody’s Analytics is separate from Moody’s Investor Service, the credit rating agency.
If the United States defaults on its debt, it would undermine faith in the federal government’s ability to pay all its bills on time, affecting the government’s credit rating and unleashing massive turbulence in financial markets.
Countries with lower credit ratings face higher interest rate costs than those that are viewed as more trustworthy borrowers. The three largest credit rating agencies – Moody’s Investor Service, S&P Global Ratings, and Fitch Ratings – rate borrowers based on their perceived ability to pay back debt.
If America’s credit rating were downgraded, that could raise borrowing costs for millions of Americans, sending mortgage, personal loan and credit card rates higher. It could make business’ borrowing costs rise and lead to layoffs – and ultimately a recession.
What gets prioritized?
Absent a bill passed by Congress and signed by Biden, Treasury will likely do everything in its power to avoid a debt default.
In contrast to debt payments, government payments like Social Security or federal worker salaries aren’t considered debt instruments, so they are less likely to come into play when the agencies rate the United States’ debt.
Zandi acknowledged that a government decision to pay back bondholders, including foreign governments like China and Japan, over an elderly Social Security recipient will likely be politically unpopular. However, he believes the government would try to prevent a debt default for as long as it can.
“The reality is, if they don’t do that, then the economy is going to evaporate, the budget deficits are going to explode, and our interest expense is going to rise because investors are going to demand higher rates,” Zandi said.
“A grandmother 10 to 20 years from now looking for a Social Security check will be much less likely to get one. At least not one as large because we’ll be in a much more precarious financial situation.”
Treasury Secretary Janet Yellen, however, has not said what the Treasury Department would do if the country hits the so-called X-date, when the government can no longer meet all its obligations. In March, she called prioritizing payments “effectively a default by just another name.”
Treasury will not be able to make everyone happy
On Friday, Yellen updated her estimate of the X-date, to June 5.
Though prioritizing debt payments might stave off an even-greater economic collapse, the United States may not emerge unscathed.
In 2011, then-Treasury Secretary Tim Geithner compared the government picking and choosing which bills to pay to a homeowner who pays their mortgage while pushing off their car loan and credit card bills: while that key housing expense is taken care of, that person would likely still have damaged credit.
Betsey Stevenson, a professor of economics and public policy at the University of Michigan, said no matter which payments Treasury decides to put first, the agency will likely be sued by those left behind.
“What should Treasury do? Should it issue new debt it’s not authorized to issue? Should it fail to pay a bill it’s required to pay? Should it fail to honor the debt that the US government has issued? There is no clear legal answer,” she said.
“Treasury doesn’t really want to answer that question, and they don’t really want to be in that position.”
The yield on the 2-year Treasury note continued to decline last week and finished the week at a lower yield than at the start of 2009. The fact the 2-year Treasury yield is now lower on a year-to-date basis is startling considering the robust performance of riskier investments such as Corporate Bonds, High-Yield Bonds, Commodities, and even stocks. On the surface, a new low for the year on the 2-year note would indicate a budding flight-to-safety rally. However, there are several rational reasons for the drop in 2-year Treasury yields, none of which are related to heightened risk aversion among investors about a renewed economic downturn.
T-Bill Supply Reduction
The most dominant factor has been a notable reduction in T-bill supply. In mid-September the Treasury announced it was not going to re-issue $185 billion in maturing T-bills originally issued as part of the Supplementary Financing Program (SFP). The SFP was launched during the fourth quarter of 2008 to assist bond market liquidity during the height of the financial crisis. With bond market liquidity vastly improved and the Treasury Department looking to extend the average maturity of outstanding debt, the Treasury decided to let all but $15 billion of SFP T-bills simply mature. The result was a 10% reduction of the T-bill market as the last SFP T-bill matured in late October.
The drop in supply comes at the wrong time as we approach year-end funding needs. As year-end approaches, banks and other institutions prepare to tidy up balance sheets by purchasing T-bills and other high quality short-term investments. To avoid illiquid trading conditions over the holidays, this process often begins before Thanksgiving. The commercial paper market, essentially the corporate version of a T-bill, is substantially reduced as a result of de-leveraging and disappearance of special purpose financing vehicles (SPVs), thereby leaving a greater-than-usual emphasis on T-bills as the vehicle of choice. Demand to fund over year-end is already reflected in zero yields on all T-bills that mature in January. Additionally, money market assets have decreased, but at $3.3 trillion they represent a hefty source of steady buying power.
The Fed is Your Friend
A friendly Federal Reserve has also been a key driver of the 2-year yield. The Fed continues to emphasize the “extended period” language when referring to the Fed funds rate. Last week, Fed Chairman Ben Bernanke, speaking before the NY Economic Club, once again reiterated that the Fed funds rate would remain low for an “extended period”. His remarks made absolutely no reference to the removal of monetary stimulus or taking steps to more proactively reduce cash in the financial system.
Most Fed speakers have reiterated Bernanke’s message with cautious remarks about removing stimulus too soon. Recently, St. Louis Fed President Bullard suggested the Fed may wish to keep the option open on bond purchase programs beyond March 2010 and when asked about timing for the first rate increase, Chicago Fed President Evans remarked “into at least the middle of 2010,” and the fi rst increase might not come until “late 2010, perhaps later in terms of 2011.” Fed fund futures pricing, one of the better gauges of Fed rate expectations, indicate the first rate increase will come at the September FOMC meeting. Previously Fed fund futures indicated the first rate increase would occur at the June FOMC meeting.
Where’s the Two Year Rate?
The decline of the 2-year note yield to 0.73% still keeps it in a range we roughly consider fair value. The 2-year maintains a tight relationship with the target Fed funds rate. Typically, when the Fed is on hold, the 2-year yield has traded 0.50% to 1.00% above the Fed funds rate. With target Fed funds currently 0.0% to 0.25%, the current 2-year yield is roughly in line with historical ranges. It is not uncommon for the 2-year yield to be lower than the Fed funds rate when the market expects a rate reduction. Although there is clearly no room for a lower Fed funds rate, the 2-year yield could drop further if the market truly believed that the economy was weakening again or that other monetary stimulus was forthcoming.
Domestic banks and foreign central banks have also played roles in a lower 2-year Treasury yield. Weak loan demand has left domestic banks with excess money reserves. With cash yielding next to nothing, banks are investing in longer-term securities such as the 2-year note. Short-term securities are much less sensitive to interest rate changes and when the Fed emphasizes it is on hold for longer, the risk in holding such a position is reduced.
Foreign central banks have purchased 2-year Treasuries as part of a renewed effort in currency intervention. The decline in the US dollar to its lowest point of the year has prompted concern from foreign governments whose economies are dependent on exports to the U.S. Foreign governments, via their central banks, have recently attempted to prop up the dollar via the purchase of short-term Treasuries.
The decline in the 2-year Treasury note yield to levels witnessed during the peak of the financial crisis has certainly caught the attention of investors. The drop in the 2-year yield has been particularly notable given the strong performance of riskier investments in 2009. However, several factors including a decline in T-bill supply, the Fed reiterating its “extended period” message, excess bank reserves, and foreign buying, have worked together to push the 2-year to its lowest levels of the past 12 months. These factors, and not a renewed flight-to-safety buying on renewed economic worries, have been responsible for the drop in 2-year Treasury yields.
IMPORTANT DISCLOSURES
This was prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you,
consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.
Mortgage-Backed Securities are subject to credit risk, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment
risk, and interest rate risk.
Municipal bonds are subject to availability, price and to market and interest rate risk is sold prior to maturity.
Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax.
Federally tax-free but other state and local taxed may apply.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
Stock investing involves risk including possible loss of principal.
The investor community is split into two factions: FIRE vs. YOLO.
The YOLO crowd includes the people who read Reddit’s r/WallStreetBets, who chase speculative trades, who place margin trades on Robinhood.
They share stock tips on Discord and bet on whatever appears in their chat feed. Earlier this week they piled investments into Galway Metals, Inc., briefly shooting up the trading volume, for no reason other than that its ticker symbol is GAYMF.
They poured into Dogecoin last night, a cryptocurrency with the face of a dog that started as a joke, causing the price to skyrocket 205 percent in a single day.
They’re placing margin bets on GameStop, triggering a short squeeze, and riding it to the moon.
They treat the stock market like a casino; they feed off tales of survivorship bias. They’re seeking alpha*, buying meme stocks**, and turning their $600 stimulus checks (“stimmies”) into the ultimate prize: enough profits to purchase a meal of chicken tenders, or “tendies.”
They’re nothing like the FIRE folks.
The FIRE crowd is passionate about index funds, passive investing, and long-term buy-and-hold. We prefer Vanguard over Robinhood and embrace the Boglehead investing philosophy.
We hope to keep pace with the overall market, not beat it, and we cite academics and advisors with peer-reviewed research to back up our ideas.
We debate about whether the 4 percent withdrawal rule is too conservative or aggressive; should it be adjusted to, say, 3.5 percent – 4.5 percent? We agonize over asset allocation and wonder whether we should add a REIT or international equities component to our two-fund portfolio. We know the expense ratio on our Vanguard target date fund.
The YOLO crowd thinks the FIRE crowd is boring, slow, conservative.
The FIRE crowd thinks the YOLO crowd is bro-ey, speculative, and unmoored from reality.
For years, the FIRE and YOLO camps maintained a peaceful coexistence, blissfully ignoring one another, each crowd living in its own universe.
We were content to ignore them; they were content to ignore us.
That changed yesterday.
Yesterday, major trading platforms did something so outrageous that their actions triggered a Congressional request for a Dept. of Justice investigation, inspired a class action lawsuit, and rapidly united the FIRE and YOLO camps into strange bedfellows.
What did they do?
They blocked us from the markets. They didn’t let us trade.
Yesterday, almost every major brokerage, including Robinhood, Schwab, Ally, Fidelity, and TD Ameritrade, halted trades on many high-profile stocks, freezing retail investors like you and me out of the game.
They targeted the trading freeze on stocks targeted by the Wall Street Bets subreddit, including GameStop, Nokia, Blackberry and AMC Theaters.
This means individual investors — you, me, Grandma — literally could not get in on the action.
To be fair, this is standard protocol when prices change too rapidly; it’s a safeguard to prevent another 2010 ‘flash crash.’ But typically, these types of trading halts affect everyone, both institutional and individual investors alike. That didn’t happen yesterday.
Individual investors (also known as ‘retail investors’) who wanted to sell were sidelined, watching prices fluctuate on assets that they wanted to liquidate, but couldn’t. They watched their gains evaporate while only a limited segment of the market — the major hedge funds and institutional investors — could freely transact.
Congressman Paul Gosar, in his request for a DOJ investigation, described this as “a concerted effort to de-platform and silence individual investors.”
When trading resumed, many brokerages — most notably Robinhood — only offered one-way trades: you could sell, but you couldn’t buy.
This is a move that drives markets. If the only choices are to hold or sell, eventually retail investors must unload, driving prices down. It reeks of market manipulation.
It outraged every individual investor.
Yesterday, FIRE and YOLO united under a common banner:
Let the people trade.
On Wednesday afternoon, I recorded a 20-minute podcast episode outlining the FIRE perspective on the GameStop rise.
I explained the history of meme stocks, the mechanics of short sales, and how the speculative frenzy over GameStop can be framed into a broader context.
On Thursday morning, when trading halted, I recorded another 9-minute episode explaining why this is an affront to all individual investors.
“Yesterday, I advised you not to be stupid,” I said. “Today, I defend your right to be stupid.”
If you want a rundown of everything that’s happened this week, listen to those two episodes.
There’s enormous context and depth to this story.
It’s a David vs. Goliath narrative — with a myriad of reasons why that narrative shouldn’t be taken at face value.
It’s a behind-the-scenes story of market makers and high-frequency traders.
It’s a story involving SEC regulations, credit line limits, and unanswered questions about decisions made in the days before the trading halt.
It’s a story of social media vs. Wall Street …⠀
… and the innocent bystanders who get caught in the crossfire. ⠀
It’s a story of stonks, stimmies, tendies, and the rise of meme stocks.
It’s a story of market manipulation and the reality that a subreddit can move markets faster than the Treasury Department. ⠀
I’ll write a detailed article next week providing context and history around Wall St Bets, GameStop, and the rise of meme stonks.
For the moment, if you want a primer on the craziness of this week, here’s where to look:
Until next week,
Paula
*“seeking alpha” is a phrase used by investors to indicate that they’re aiming for better-than-market returns.
**a “meme stock” is any stock that gets bid up based on a groundswell of enthusiasm from individual investors, not as a result of fundamentals but rather as a result of flash trends.
In Best Low-Risk Investments for 2023, I provided a comprehensive list of low-risk investments with predictable returns. But it’s precisely because those returns are low-risk that they also provide relatively low returns.
In this article, we’re going to look at high-yield investments, many of which involve a higher degree of risk but are also likely to provide higher returns.
True enough, low-risk investments are the right investment solution for anyone who’s looking to preserve capital and still earn some income.
But if you’re more interested in the income side of an investment, accepting a bit of risk can produce significantly higher returns. And at the same time, these investments will generally be less risky than growth stocks and other high-risk/high-reward investments.
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Determine How Much Risk You’re Willing to Take On
The risk we’re talking about with these high-yield investments is the potential for you to lose money. As is true when investing in any asset, you need to begin by determining how much you’re willing to risk in the pursuit of higher returns.
Chasing “high-yield returns” will make you broke if you don’t have clear financial goals you’re working towards.
I’m going to present a large number of high-yield investments, each with its own degree of risk. The purpose is to help you evaluate the risk/reward potential of these investments when selecting the ones that will be right for you.
If you’re looking for investments that are completely safe, you should favor one or more of the highly liquid, low-yield vehicles covered in Best Low-Risk Investments for 2023. In this article, we’re going to be going for something a little bit different. As such, please note that this is not in any way a blanket recommendation of any particular investment.
Best High-Yield Investments for 2023
Table of Contents
Below is my list of the 18 best high-yield investments for 2023. They’re not ranked or listed in order of importance. That’s because each is a unique investment class that you will need to carefully evaluate for suitability within your own portfolio.
Be sure that any investment you do choose will be likely to provide the return you expect at an acceptable risk level for your own personal risk tolerance.
1. Treasury Inflation-Protected Securities (TIPS)
Let’s start with this one, if only because it’s on just about every list of high-yield investments, especially in the current environment of rising inflation. It may not actually be the best high-yield investment, but it does have its virtues and shouldn’t be overlooked.
Basically, TIPS are securities issued by the U.S. Treasury that are designed to accommodate inflation. They do pay regular interest, though it’s typically lower than the rate paid on ordinary Treasury securities of similar terms. The bonds are available with a minimum investment of $100, in terms of five, 10, and 30 years. And since they’re fully backed by the U.S. government, you are assured of receiving the full principal value if you hold a security until maturity.
But the real benefit—and the primary advantage—of these securities is the inflation principal additions. Each year, the Treasury will add an amount to the bond principal that’s commensurate with changes in the Consumer Price Index (CPI).
Fortunately, while the principal will be added when the CPI rises (as it nearly always does), none will be deducted if the index goes negative.
You can purchase TIPS through the U.S. Treasury’s investment portal, Treasury Direct. You can also hold the securities as well as redeem them on the same platform. There are no commissions or fees when buying securities.
On the downside, TIPS are purely a play on inflation since the base rates are fairly low. And while the principal additions will keep you even with inflation, you should know that they are taxable in the year received.
Still, TIPS are an excellent low-risk, high-yield investment during times of rising inflation—like now.
2. I Bonds
If you’re looking for a true low-risk, high-yield investment, look no further than Series I bonds. With the current surge in inflation, these bonds have become incredibly popular, though they are limited.
I bonds are currently paying 6.89%. They can be purchased electronically in denominations as little as $25. However, you are limited to purchasing no more than $10,000 in I bonds per calendar year. Since they are issued by the U.S. Treasury, they’re fully protected by the U.S. government. You can purchase them through the Treasury Department’s investment portal, TreasuryDirect.gov.
“The cash in my savings account is on fire,” groans Scott Lieberman, Founder of Touchdown Money. “Inflation has my money in flames, each month incinerating more and more. To defend against this, I purchased an I bond. When I decide to get my money back, the I bond will have been protected against inflation by being worth more than what I bought it for. I highly recommend getting yourself a super safe Series I bond with money you can stash away for at least one year.”
You may not be able to put your entire bond portfolio into Series I bonds. But just a small investment, at nearly 10%, can increase the overall return on your bond allocation.
3. Corporate Bonds
The average rate of return on a bank savings account is 0.33%. The average rate on a money market account is 0.09%, and 0.25% on a 12-month CD.
Now, there are some banks paying higher rates, but generally only in the 1%-plus range.
If you want higher returns on your fixed income portfolio, and you’re willing to accept a moderate level of risk, you can invest in corporate bonds. Not only do they pay higher rates than banks, but you can lock in those higher rates for many years.
For example, the average current yield on a AAA-rated corporate bond is 4.55%. Now that’s the rate for AAA bonds, which are the highest-rated securities. You can get even higher rates on bonds with lower ratings, which we will cover in the next section.
Corporate bonds sell in face amounts of $1,000, though the price may be higher or lower depending on where interest rates are. If you choose to buy individual corporate bonds, expect to buy them in lots of ten. That means you’ll likely need to invest $10,000 in a single issue. Brokers will typically charge a small per-bond fee on purchase and sale.
An alternative may be to take advantage of corporate bond funds. That will give you an opportunity to invest in a portfolio of bonds for as little as the price of one share of an ETF. And because they are ETFs, they can usually be bought and sold commission free.
You can typically purchase corporate bonds and bond funds through popular stock brokers, like Zacks Trade, TD Ameritrade.
Corporate Bond Risk
Be aware that the value of corporate bonds, particularly those with maturities greater than 10 years, can fall if interest rates rise. Conversely, the value of the bonds can rise if interest rates fall.
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4. High-Yield Bonds
In the previous section we talked about how interest rates on corporate bonds vary based on each bond issue’s rating. A AAA bond, being the safest, has the lowest yield. But a riskier bond, such as one rated BBB, will provide a higher rate of return.
If you’re looking to earn higher interest than you can with investment-grade corporate bonds, you can get those returns with so-called high-yield bonds. Because they have a lower rating, they pay higher interest, sometimes much higher.
The average yield on high-yield bonds is 8.29%. But that’s just an average. The yield on a bond rated B will be higher than one rated BB.
You should also be aware that, in addition to potential market value declines due to rising interest rates, high-yield bonds are more likely to default than investment-grade bonds. That’s why they pay higher interest rates. (They used to call these bonds “junk bonds,” but that kind of description is a marketing disaster.) Because of those twin risks, junk bonds should occupy only a small corner of your fixed-income portfolio.
High Yield Bond Risk
In a rapidly rising interest rate environment, high-yield bonds are more likely to default.
High-yield bonds can be purchased under similar terms and in the same places where you can trade corporate bonds. There are also ETFs that specialize in high-yield bonds and will be a better choice for most investors, since they will include diversification across many different bond issues.
5. Municipal Bonds
Just as corporations and the U.S. Treasury issue bonds, so do state and local governments. These are referred to as municipal bonds. They work much like other bond types, particularly corporates. They can be purchased in similar denominations through online brokers.
The main advantage enjoyed by municipal bonds is their tax-exempt status for federal income tax purposes. And if you purchase a municipal bond issued by your home state, or a municipality within that state, the interest will also be tax-exempt for state income tax purposes.
That makes municipal bonds an excellent source of tax-exempt income in a nonretirement account. (Because retirement accounts are tax-sheltered, it makes little sense to include municipal bonds in those accounts.)
Municipal bond rates are currently hovering just above 3% for AAA-rated bonds. And while that’s an impressive return by itself, it masks an even higher yield.
Because of their tax-exempt status, the effective yield on municipal bonds will be higher than the note rate. For example, if your combined federal and state marginal income tax rates are 25%, the effective yield on a municipal bond paying 3% will be 4%. That gives an effective rate comparable with AAA-rated corporate bonds.
Municipal bonds, like other bonds, are subject to market value fluctuations due to interest rate changes. And while it’s rare, there have been occasional defaults on these bonds.
Like corporate bonds, municipal bonds carry ratings that affect the interest rates they pay. You can investigate bond ratings through sources like Standard & Poor’s, Moody’s, and Fitch.
Fund
Symbol
Type
Current Yield
5 Average Annual Return
Vanguard Inflation-Protected Securities Fund
VIPSX
TIPS
0.06%
3.02%
SPDR® Portfolio Interm Term Corp Bond ETF
SPIB
Corporate
4.38%
1.44%
iShares Interest Rate Hedged High Yield Bond ETF
HYGH
High-Yield
5.19%
2.02%
Invesco VRDO Tax-Free ETF (PVI)
PVI
Municipal
0.53%
0.56%
6. Longer Term Certificates of Deposit (CDs)
This is another investment that falls under the low risk/relatively high return classification. As interest rates have risen in recent months, rates have crept up on certificates of deposit. Unlike just one year ago, CDs now merit consideration.
But the key is to invest in certificates with longer terms.
“Another lower-risk option is to consider a Certificate of Deposit (CD),” advises Lance C. Steiner, CFP at Buckingham Advisors. “Banks, credit unions, and many other financial institutions offer CDs with maturities ranging from 6 months to 60 months. Currently, a 6-month CD may pay between 0.75% and 1.25% where a 24-month CD may pay between 2.20% and 3.00%. We suggest considering a short-term ladder since interest rates are expected to continue rising.” (Stated interest rates for the high-yield savings and CDs were obtained at bankrate.com.)
Most banks offer certificates of deposit with terms as long as five years. Those typically have the highest yields.
But the longer term does involve at least a moderate level of risk. If you invest in a CD for five years that’s currently paying 3%, the risk is that interest rates will continue rising. If they do, you’ll miss out on the higher returns available on newer certificates. But the risk is still low overall since the bank guarantees to repay 100% of your principle upon certificate maturity.
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7. Peer-to-Peer (P2P) Lending
Do you know how banks borrow from you—at 1% interest—then loan the same money to your neighbor at rates sometimes as high as 20%? It’s quite a racket, and a profitable one at that.
But do you also know that you have the same opportunity as a bank? It’s an investing process known as peer-to-peer lending, or P2P for short.
P2P lending essentially eliminates the bank. As an investor, you’ll provide the funds for borrowers on a P2P platform. Most of these loans will be in the form of personal loans for a variety of purposes. But some can also be business loans, medical loans, and for other more specific purposes.
As an investor/lender, you get to keep more of the interest rate return on those loans. You can invest easily through online P2P platforms.
One popular example is Prosper. They offer primarily personal loans in amounts ranging between $2,000 and $40,000. You can invest in small slivers of these loans, referred to as “notes.” Notes can be purchased for as little as $25.
That small denomination will make it possible to diversify your investment across many different loans. You can even choose the loans you will invest in based on borrower credit scores, income, loan terms, and purposes.
Prosper, which has managed $20 billion in P2P loans since 2005, claims a historical average return of 5.7%. That’s a high rate of return on what is essentially a fixed-income investment. But that’s because there exists the possibility of loss due to borrower default.
However, you can minimize the likelihood of default by carefully choosing borrower loan quality. That means focusing on borrowers with higher credit scores, incomes, and more conservative loan purposes (like debt consolidation).
8. Real Estate Investment Trusts (REITs)
REITs are an excellent way to participate in real estate investment, and the return it provides, without large amounts of capital or the need to manage properties. They’re publicly traded, closed-end investment funds that can be bought and sold on major stock exchanges. They invest primarily in commercial real estate, like office buildings, retail space, and large apartment complexes.
If you’re planning to invest in a REIT, you should be aware that there are three different types.
“Equity REITs purchase commercial, industrial, or residential real estate properties,” reports Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University and co-author of several books, including The Tools and Techniques Of Investment Planning, Strategic Value Investing and Investment Banking for Dummies. “Income is derived primarily from the rental on the properties, as well as from the sale of properties that have increased in value. Mortgage REITs invest in property mortgages. The income is primarily from the interest they earn on the mortgage loans. Hybrid REITs invest both directly in property and in mortgages on properties.”
Johnson also cautions:
“Investors should understand that equity REITs are more like stocks and mortgage REITs are more like bonds. Hybrid REITs are like a mix of stocks and bonds.”
Mortgage REITs, in particular, are an excellent way to earn steady dividend income without being closely tied to the stock market.
Examples of specific REITs are listed in the table below (source: Kiplinger):
REIT
Equity or Mortgage
Property Type
Dividend Yield
12 Month Return
Rexford Industrial Realty
REXR
Industrial warehouse space
2.02%
2.21%
Sun Communities
SUI
Manufactured housing, RVs, resorts, marinas
2.19%
-14.71%
American Tower
AMT
Multi-tenant cell towers
2.13%
-9.00%
Prologis
PLD
Industrial real estate
2.49%
-0.77%
Camden Property Trust
CPT
Apartment complexes
2.77%
-7.74%
Alexandria Real Estate Equities
ARE
Research Properties
3.14%
-23.72%
Digital Realty Trust
DLR
Data centers
3.83%
-17.72%
9. Real Estate Crowdfunding
If you prefer direct investment in a property of your choice, rather than a portfolio, you can invest in real estate crowdfunding. You invest your money, but management of the property will be handled by professionals. With real estate crowdfunding, you can pick out individual properties, or invest in nonpublic REITs that invest in very specific portfolios.
One of the best examples of real estate crowdfunding is Fundrise. That’s because you can invest with as little as $500 or create a customized portfolio with no more than $1,000. Not only does Fundrise charge low fees, but they also have multiple investment options. You can start small in managed investments, and eventually trade up to investing in individual deals.
One thing to be aware of with real estate crowdfunding is that many require accredited investor status. That means being high income, high net worth, or both. If you are an accredited investor, you’ll have many more choices in the real estate crowdfunding space.
If you are not an accredited investor, that doesn’t mean you’ll be prevented from investing in this asset class. Part of the reason why Fundrise is so popular is that they don’t require accredited investor status. There are other real estate crowdfunding platforms that do the same.
Just be careful if you want to invest in real estate through real estate crowdfunding platforms. You will be expected to tie your money up for several years, and early redemption is often not possible. And like most investments, there is the possibility of losing some or all your investment principal.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
10. Physical Real Estate
We’ve talked about investing in real estate through REITs and real estate crowdfunding. But you can also invest directly in physical property, including residential property or even commercial.
Owning real estate outright means you have complete control over the investment. And since real estate is a large-dollar investment, the potential returns are also large.
For starters, average annual returns on real estate are impressive. They’re even comparable to stocks. Residential real estate has generated average returns of 10.6%, while commercial property has returned an average of 9.5%.
Next, real estate has the potential to generate income from two directions, from rental income and capital gains. But because of high property values in many markets around the country, it will be difficult to purchase real estate that will produce a positive cash flow, at least in the first few years.
Generally speaking, capital gains are where the richest returns come from. Property purchased today could double or even triple in 20 years, creating a huge windfall. And this will be a long-term capital gain, to get the benefit of a lower tax bite.
Finally, there’s the leverage factor. You can typically purchase an investment property with a 20% down payment. That means you can purchase a $500,000 property with $100,000 out-of-pocket.
By calculating your capital gains on your upfront investment, the returns are truly staggering. If the $500,000 property doubles to $1 million in 20 years, the $500,000 profit generated will produce a 500% gain on your $100,000 investment.
On the negative side, real estate is certainly a very long-term investment. It also comes with high transaction fees, often as high as 10% of the sale price. And not only will it require a large down payment up front, but also substantial investment of time managing the property.
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11. High Dividend Stocks
“The best high-yield investment is dividend stocks,” declares Harry Turner, Founder at The Sovereign Investor. “While there is no guaranteed return with stocks, over the long term stocks have outperformed other investments such as bonds and real estate. Among stocks, dividend-paying stocks have outperformed non-dividend paying stocks by more than 2 percentage points per year on average over the last century. In addition, dividend stocks tend to be less volatile than non-dividend paying stocks, meaning they are less likely to lose value in downturns.”
You can certainly invest in individual stocks that pay high dividends. But a less risky way to do it, and one that will avoid individual stock selection, is to invest through a fund.
One of the most popular is the ProShares S&P 500 Dividend Aristocrat ETF (NOBL). It has provided a return of 1.67% in the 12 months ending May 31, and an average of 12.33% per year since the fund began in October 2013. The fund currently has a 1.92% dividend yield.
The so-called Dividend Aristocrats are popular because they represent 60+ S&P 500 companies, with a history of increasing their dividends for at least the past 25 years.
“Dividend Stocks are an excellent way to earn some quality yield on your investments while simultaneously keeping inflation at bay,” advises Lyle Solomon, Principal Attorney at Oak View Law Group, one of the largest law firms in America. “Dividends are usually paid out by well-established and successful companies that no longer need to reinvest all of the profits back into the business.”
It gets better. “These companies and their stocks are safer to invest in owing to their stature, large customer base, and hold over the markets,” adds Solomon. “The best part about dividend stocks is that many of these companies increase dividends year on year.”
The table below shows some popular dividend-paying stocks. Each is a so-called “Dividend Aristocrat”, which means it’s part of the S&P 500 and has increased its dividend in each of at least the past 25 years.
Company
Symbol
Dividend
Dividend Yield
AbbVie
ABBV
$5.64
3.80%
Armcor PLC
AMCR
$0.48
3.81%
Chevron
CVX
$5.68
3.94%
ExxonMobil
XOM
$3.52
4.04%
IBM
IBM
$6.60
5.15%
Realty Income Corp
O
$2.97
4.16%
Walgreen Boots Alliance
WBA
$1.92
4.97%
12. Preferred Stocks
Preferred stocks are a very specific type of dividend stock. Just like common stock, preferred stock represents an interest in a publicly traded company. They’re often thought of as something of a hybrid between stocks and bonds because they contain elements of both.
Though common stocks can pay dividends, they don’t always. Preferred stocks on the other hand, always pay dividends. Those dividends can be either a fixed amount or based on a variable dividend formula. For example, a company can base the dividend payout on a recognized index, like the LIBOR (London Inter-Bank Offered Rate). The percentage of dividend payout will then change as the index rate does.
Preferred stocks have two major advantages over common stock. First, as “preferred” securities, they have a priority on dividend payments. A company is required to pay their preferred shareholders dividends ahead of common stockholders. Second, preferred stocks have higher dividend yields than common stocks in the same company.
You can purchase preferred stock through online brokers, some of which are listed under “Growth Stocks” below.
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Preferred Stock Caveats
The disadvantage of preferred stocks is that they don’t entitle the holder to vote in corporate elections. But some preferred stocks offer a conversion option. You can exchange your preferred shares for a specific number of common stock shares in the company. Since the conversion will likely be exercised when the price of the common shares takes a big jump, there’s the potential for large capital gains—in addition to the higher dividend.
Be aware that preferred stocks can also be callable. That means the company can authorize the repurchase of the stock at its discretion. Most will likely do that at a time when interest rates are falling, and they no longer want to pay a higher dividend on the preferred stock.
Preferred stock may also have a maturity date, which is typically 30–40 years after its original issuance. The company will typically redeem the shares at the original issue price, eliminating the possibility of capital gains.
Not all companies issue preferred stock. If you choose this investment, be sure it’s with a company that’s well-established and has strong financials. You should also pay close attention to the details of the issuance, including and especially any callability provisions, dividend formulas, and maturity dates.
13. Growth Stocks
This sector is likely the highest risk investment on this list. But it also may be the one with the highest yield, at least over the long term. That’s why we’re including it on this list.
Based on the S&P 500 index, stocks have returned an average of 10% per year for the past 50 years. But it is important to realize that’s only an average. The market may rise 40% one year, then fall 20% the next. To be successful with this investment, you must be committed for the long haul, up to and including several decades.
And because of the potential wide swings, growth stocks are not recommended for funds that will be needed within the next few years. In general, growth stocks work best for retirement plans. That’s where they’ll have the necessary decades to build and compound.
Since most of the return on growth stocks is from capital gains, you’ll get the benefit of lower long-term capital gains tax rates, at least with securities held in a taxable account. (The better news is capital gains on investments held in retirement accounts are tax-deferred until retirement.)
You can choose to invest in individual stocks, but that’s a fairly high-maintenance undertaking. A better way may be to simply invest in ETFs tied to popular indexes. For example, ETFs based on the S&P 500 are very popular among investors.
You can purchase growth stocks and growth stock ETFs commission free with brokers like M1 Finance, Zacks Trade, Wealthsimple.
14. Annuities
Annuities are something like creating your own private pension. It’s an investment contract you take with an insurance company, in which you invest a certain amount of money in exchange for a specific income stream. They can be an excellent source of high yields because the return is locked in by the contract.
Annuities come in many different varieties. Two major classifications are immediate and deferred annuities. As the name implies, immediate annuities begin paying an income stream shortly after the contract begins.
Deferred annuities work something like retirement plans. You may deposit a fixed amount of money with the insurance company upfront or make regular installments. In either case, income payments will begin at a specified point in the future.
With deferred annuities, the income earned within the plan is tax-deferred and paid upon withdrawal. But unlike retirement accounts, annuity contributions are not tax-deductible. Investment returns can either be fixed-rate or variable-rate, depending on the specific annuity setup.
While annuities are an excellent idea and concept, the wide variety of plans as well as the many insurance companies and agents offering them, make them a potential minefield. For example, many annuities are riddled with high fees and are subject to limited withdrawal options.
Because they contain so many moving parts, any annuity contracts you plan to enter into should be carefully reviewed. Pay close attention to all the details, including the small ones. It is, after all, a contract, and therefore legally binding. For that reason, you may want to have a potential annuity reviewed by an attorney before finalizing the deal.
15. Alternative Investments
Alternative investments cover a lot of territory. Examples include precious metals, commodities, private equity, art and collectibles, and digital assets. These fall more in the category of high risk/potential high reward, and you should proceed very carefully and with only the smallest slice of your portfolio.
To simplify the process of selecting alternative assets, you can invest through platforms such as Yieldstreet. With a single cash investment, you can invest in multiple alternatives.
“Investors can purchase real estate directly on Yieldstreet, through fractionalized investments in single deals,” offers Milind Mehere, Founder & Chief Executive Officer at Yieldstreet. “Investors can access private equity and private credit at high minimums by investing in a private market fund (think Blackstone or KKR, for instance). On Yieldstreet, they can have access to third-party funds at a fraction of the previously required minimums. Yieldstreet also offers venture capital (fractionalized) exposure directly. Buying a piece of blue-chip art can be expensive, and prohibitive for most investors, which is why Yieldstreet offers fractionalized assets to diversified art portfolios.”
Yieldstreet also provides access to digital asset investments, with the benefit of allocating to established professional funds, such as Pantera or Osprey Fund. The platform does not currently offer commodities but plans to do so in the future.
Access to wide array of alternative asset classes
Access to ultra-wealthy investments
Can invest for income or growth
Learn More Now
Alternative investments largely require thinking out-of-the-box. Some of the best investment opportunities are also the most unusual.
“The price of meat continues to rise, while agriculture remains a recession-proof investment as consumer demand for food is largely inelastic,” reports Chris Rawley, CEO of Harvest Returns, a platform for investing in private agriculture companies. “Consequently, investors are seeing solid returns from high-yield, grass-fed cattle notes.”
16. Interest Bearing Crypto Accounts
Though the primary appeal of investing in cryptocurrency has been the meteoric rises in price, now that the trend seems to be in reverse, the better play may be in interest-bearing crypto accounts. A select group of crypto exchanges pays high interest on your crypto balance.
One example is Gemini. Not only do they provide an opportunity to buy, sell, and store more than 100 cryptocurrencies—plus non-fungible tokens (NFTs)—but they are currently paying 8.05% APY on your crypto balance through Gemini Earn.
In another variation of being able to earn money on crypto, Crypto.com pays rewards of up to 14.5% on crypto held on the platform. That’s the maximum rate, as rewards vary by crypto. For example, rewards on Bitcoin and Ethereum are paid at 6%, while stablecoins can earn 8.5%.
It’s important to be aware that when investing in cryptocurrency, you will not enjoy the benefit of FDIC insurance. That means you can lose money on your investment. But that’s why crypto exchanges pay such high rates of return, whether it’s in the form of interest or rewards.
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17. Crypto Staking
Another way to play cryptocurrency is a process known as crypto staking. This is where the crypto exchange pays you a certain percentage as compensation or rewards for monitoring a specific cryptocurrency. This is not like crypto mining, which brings crypto into existence. Instead, you’ll participate in writing that particular blockchain and monitoring its security.
“Crypto staking is a concept wherein you can buy and lock a cryptocurrency in a protocol, and you will earn rewards for the amount and time you have locked the cryptocurrency,” reports Oak View Law Group’s Lyle Solomon.
“The big downside to staking crypto is the value of cryptocurrencies, in general, is extremely volatile, and the value of your staked crypto may reduce drastically,” Solomon continues, “However, you can stake stable currencies like USDC, which have their value pegged to the U.S. dollar, and would imply you earn staked rewards without a massive decrease in the value of your investment.”
Much like earning interest and rewards on crypto, staking takes place on crypto exchanges. Two exchanges that feature staking include Coinbase and Kraken. These are two of the largest crypto exchanges in the industry, and they provide a wide range of crypto opportunities, in addition to staking.
Invest in Startup Businesses and Companies
Have you ever heard the term “angel investor”? That’s a private investor, usually, a high net worth individual, who provides capital to small businesses, often startups. That capital is in the form of equity. The angel investor invests money in a small business, becomes a part owner of the company, and is entitled to a share of the company’s earnings.
In most cases, the angel investor acts as a silent partner. That means he or she receives dividend distributions on the equity invested but doesn’t actually get involved in the management of the company.
It’s a potentially lucrative investment opportunity because small businesses have a way of becoming big businesses. As they grow, both your equity and your income from the business also grow. And if the business ever goes public, you could be looking at a life-changing windfall!
Easy Ways to Invest in Startup Businesses
Mainvest is a simple, easy way to invest in small businesses. It’s an online investment platform where you can get access to returns as high as 25%, with an investment of just $100. Mainvest offers vetted businesses (the acceptance rate is just 5% of business that apply) for you to invest in.
It collects revenue, which will be paid to you quarterly. And because the minimum required investment is so small, you can invest in several small businesses at the same time. One of the big advantages with Mainvest is that you are not required to be an accredited investor.
Still another opportunity is through Fundrise Innovation Fund. I’ve already covered how Fundrise is an excellent real estate crowdfunding platform. But through their recently launched Innovaton Fund, you’ll have opportunity to invest in high-growth private technology companies. As a fund, you’ll invest in a portfolio of late-stage tech companies, as well as some public equities.
The purpose of the fund is to provide high growth, and the fund is currently offering shares with a net asset value of $10. These are long-term investments, so you should expect to remain invested for at least five years. But you may receive dividends in the meantime.
Like Mainvest, the Fundrise Innovation Fund does not require you to be an accredited investor.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
Final Thoughts on High Yield Investing
Notice that I’ve included a mix of investments based on a combination of risk and return. The greater the risk associated with the investment, the higher the stated or expected return will be.
It’s important when choosing any of these investments that you thoroughly assess the risk involved with each, and not focus primarily on return. These are not 100% safe investments, like short-term CDs, short-term Treasury securities, savings accounts, or bank money market accounts.
Because there is risk associated with each, most are not suitable as short-term investments. They make most sense for long-term investment accounts, particularly retirement accounts.
For example, growth stocks—and most stocks, for that matter—should generally be in a retirement account. While there will be years when you will suffer losses in your position, you’ll have enough years to offset those losses between now and retirement.
Also, if you don’t understand any of the above investments, it will be best to avoid making them. And for more complicated investments, like annuities, you should consult with a professional to evaluate the suitability and all the provisions it contains.
FAQ’s on High Yield Investment Options
What investment has the highest yield?
The investment with the highest yield will vary depending on a number of factors, including current market conditions and the amount of risk an investor is willing to take on. Generally speaking, investments with the potential for high yields also come with a higher level of risk, so it’s important for investors to carefully consider their options and choose investments that align with their financial goals and risk tolerance.
Some examples of high-yield investments include:
1. Stocks: Some stocks may offer high dividend yields, which is the annual dividend payment a company makes to its shareholders, expressed as a percentage of the stock’s current market price.
2. Real estate: Investing in real estate, either directly by purchasing property or indirectly through a real estate investment trust (REIT), can potentially generate high returns in the form of rental income and appreciation of the property value.
3. High-yield bonds: High-yield bonds, also known as junk bonds, are bonds that are issued by companies with lower credit ratings and thus offer higher yields to compensate for the added risk.
4. Private lending: Investing in private loans, such as through peer-to-peer lending platforms, can potentially offer high yields, but it also carries a higher level of risk.
5. Commodities: Investing in commodities, such as precious metals or oil, can potentially generate high returns if the prices of those commodities rise. However, the prices of commodities can also be volatile and subject to market fluctuations.
It’s important to note that these are just examples and not recommendations. As with any investment, it’s crucial to carefully research and consider all the potential risks and rewards before making a decision.
Where can I invest my money to get high returns?
There are a number of places you can invest your money to get high returns. One option is to invest in stocks, which typically offer higher returns than other investment options. Another option is to invest in bonds, which are considered a relatively safe investment option.
You could also invest in real estate, which has the potential to provide high returns if done correctly. Finally, you could also invest in commodities, such as gold or silver, which can be a risky investment but can also offer high returns.
What investments can I make a 10% return?
It’s difficult to predict exactly what investments will generate a 10% return, as investment returns can vary depending on a number of factors, including market conditions and the performance of the specific investment. Some investments, such as stocks and real estate, have the potential to generate returns in excess of 10%, but they also come with a higher level of risk. It’s important to remember that past performance is not necessarily indicative of future results, and that all investments carry some degree of risk
We often hear stocks and bonds mentioned together as if they’re pretty much the same thing.
But are they? Not really.
In fact, it might even be that most people understand stocks even better than bonds. After all, relatively few people own bonds individually.
So, what is a bond, and how may it fit in your overall investment portfolio?
So, What Is A Bond, Exactly?
Bonds are securities representing debt obligations, usually issued by either corporations or governments.
They’re normally issued in denominations of $1,000 and pay interest twice each year. What’s more, the interest rate is fixed for the duration of the bond.
And if the bond is held to maturity, the investor will be paid the full face amount of the security.
As an example, if you purchase a bond for $1,000, with an interest rate of 4% and a term of 20 years, you will be paid $40 per year – $20 every 6 months – until the bond is paid in full 20 years later.
Bonds are much like certificates of deposit, except that they are issued by institutions other than banks, and have much longer terms. They also lack the FDIC insurance coverage that comes with bank-issued CDs.
Bonds are long-term securities, with terms greater than 10 years.
However, investors often lump any type of fixed income investment into the bonds category.
That can include securities with a term of anywhere from a few months to 30 years.
What Types of Bonds are There?
There are 3 primary types of bonds:
Corporate
US Treasuries
Municipal Bonds
Let’s take a look at each.
Corporate Bonds
These are bonds issued by publicly traded corporations and often listed on public exchanges. They can be used for a variety of business purposes, including paying off old debt, expanding operations, raising extra cash, or even acquiring competitors.
They’re generally considered less safe than US Treasuries and pay a higher rate of interest as a result.
Exactly how much interest they’ll pay will depend upon their bond rating, as issued by large bond rating services, such as Moody’s or Standard & Poor’s.
Bonds with ratings of BBB through AAA are considered the safest and rated as investment grade.
Lower rated bonds once referred to as “junk bonds”, are now called “high yield bonds”, and pay much higher rates of interest. Naturally, such bonds are also more likely to default and considered riskier.
Corporate bonds can generally be purchased through investment brokerage firms. They’re typically bought in denominations of $1,000, but you may have to buy a minimum of 10 bonds, or $10,000. Both purchase and sale will generally involve a small commission.
US Treasury Securities
US Treasury Securities come in a wide variety of terms. Technically speaking, only one security is actually a bond, which is the US Treasury bond. But just to clear up any confusion, we’ll discuss the various types of US Treasury securities that are available.
US Treasury Bonds. These are the longest term treasuries, with a maturity of 30 years. They are available in denominations of as little as $100 and pay interest every six months.
US Treasury Bills. These are the shortest term treasuries, with maturities ranging from a few days up to 52 weeks.
They can be purchased in denominations of $100, but are bought at a discount.
For example, you might purchase a Treasury bill for $99, which you will redeem at maturity for $100. The additional $1 paid represents interest paid on the security.
US Treasury Notes. Notes have maturities of 2, 3, 5, 7, and 10 years. They pay interest every six months and are available in denominations of $100.
Treasury Inflation-Protected Securities (TIPS). These are interest bearing treasuries that also increase your principal based on changes in the consumer price index (CPI). They come with maturities of 5, 10, and 30 years. The interest paid is lower than Treasury securities with comparable terms, but the principal additions are meant to keep the value of the security up with inflation.
US Savings Bonds. Available as EE and E savings bonds, they are available in denominations of $25 and earn interest for up to 30 years. There is also the I Savings Bond, which like TIPS, increases the principal value of the security based on changes in the CPI.
Where to Buy US Treasury Securities
All US Treasury Securities can be purchased, held, and redeemed through the US Treasury department’s web portal, Treasury Direct. They can also be purchased through investment brokerage firms, though there may be a nominal fee for both purchase and sale.
Municipal Bonds
These are bonds issued by local governments, including states, counties, municipalities, and their various agencies.
They have the advantage of not being subject to federal income tax. And if you are a resident of the same state where the bonds are issued, the interest will also be free from state income tax.
However, if you live in a different state, the interest will be taxable in your state of residence, if it has an income tax.
Municipal bonds can generally be purchased through investment brokerage firms, and once again for a small commission on both purchase and sale.
For those looking to get started in bond-investing, Worthy Peer Capital is a good place to start.
What are the Benefits of Bonds?
Bonds have two basic benefits, at least compared to stocks.
The first is relative safety. While stock prices fluctuate, bonds are repaid at the full face value if they are held to maturity. This makes them a solid diversification away from stocks.
Holding a certain percentage of your portfolio in bonds can reduce the overall volatility and has been shown to improve long-term investment results.
The second benefit is steady income.
The interest paid on bonds is a contractual obligation. Unlike dividends, which can be either reduced or eliminated by the issuing institution, the interest rate set on a bond upon issue is guaranteed until maturity.
This provides the bondholder with a steady source of income, even while stocks may be fluctuating in value.
There’s a third benefit bonds have in common with stocks, and that’s the potential for capital appreciation. It has to do with changes in interest rates.
Let’s say you purchased $10,000 of a certain bond with a 5% interest rate.
Two years later, prevailing interest rates fall to 4%. The value of your bond increases to $12,500, which gives it a 4% yield.
You then sell the bonds and collect a $2,500 capital gain on the transaction.
What are the Risks of Bonds?
Despite the advantages of holding bonds, they’re not without risks. There are two primary risks.
Issuer default. This is a bigger concern with corporate bonds. A company can fall on hard times, and default on its debts. Not only would you lose the interest income, but the principal as well. There are different ways this can play out. In a corporate bankruptcy situation, you may receive partial value of the bonds.
But in an extreme situation, the bonds may be declared completely worthless.
Since they are issued by the US government, Treasury securities are considered immune from default. Municipal bonds do have a slight possibility of default, but in fact, defaults have been very rare on these securities historically.
Interest rate risk. In the last section, we talked about the possibility of bonds providing capital gains if you purchase a bond then sell it into a market with lower interest rates. But the opposite can happen if interest rates rise.
Let’s reverse the example given earlier. You purchase $10,000 in bonds paying 4%. Two years later the prevailing rate on bonds is 5%. You sell the bonds at $8,000, which is the principal value that will produce a 5% return. In the process, you take a $2,000 capital loss.
This is referred to as interest rate risk – the risk that the value of your bonds will fall if interest rates rise.
The major disadvantage with bonds is that they have an inverse relationship with interest rates. Rising rates equal falling values while falling rates equal rising values.
You should also be aware that US Treasury bonds are also subject to interest rate risk, even though the principal value of the bonds is guaranteed at maturity.
So far we’ve been talking about purchasing individual bonds.
But you can also invest in bonds through bond funds. Bonds are sold through funds, just the way stocks are. Each is a portfolio of bonds held in a single investment unit. The fund may hold hundreds of different bond issues and will be run by an investment manager.
It’s important to understand that there is a wide variety of bond funds. In fact, you can choose a fund based on your own investment preferences.
For example, you can invest in a bond fund that holds only US Treasuries, municipal bonds, or corporate bonds. You can also invest in funds that hold foreign bonds.
Some very specialized bond funds invest only in securities with limited terms.
For example, a bond fund may hold sureties due to mature within 5 years.
That can include five year Treasury notes, but it can also include 20 year corporate bonds due to mature within 5 years. Investors often choose shorter-term bond funds to minimize or eliminate interest rate risk.
You can also invest in bond funds that hold only non-investment grade bonds (bonds with ratings below BBB). These funds are riskier than the ones that hold higher-quality bonds, but they provide higher interest rate returns.
An investor may take a small position in a high-interest bond fund to increase overall yield on a larger bond portfolio.
Bond funds offer professional management, as well as greater diversification.
However, they typically charge commissions, known as “load fees”, that can range between 1% and 3% of the fund value.
You can invest in bond funds through investment brokers, or through large mutual fund companies like Vanguard and Fidelity.
How Much of Your Portfolio Should You Hold in Bonds?
Virtually everyone who invests should have at least some money invested in fixed income investments, including bonds.
They provide greater stability in an investment portfolio and are particularly valuable during downturns in the stock market. Not only are they more likely to retain their value in a market decline, but they’ll also pay interest income along the way.
But there’s much debate about exactly how much you should hold in bonds. Different factors have to be considered, including your age, your investment time horizon, and your market risk tolerance.
But there are some formulas that reduce the allocation percentage to a mathematical equation.
One that’s grown popular in recent years is 120 minus your age. For example, If you’re 40 years old, 80% (120 minus 40) of your portfolio should be held in stocks, while 20% should be held in bonds.
If you’re 60, then 60% (120 minus 60) should be held in stocks and the remaining 40% in bonds.
The formula might not be entirely fool-proof, but it at least accounts for your age and investment time horizon.
For example, notice that as you get older, the bond portfolio percentage increases.
This is consistent with what investment managers typically recommend. The closer you get to retirement, the lower your stock exposure should be.
It doesn’t really take risk tolerance into account, but you can use the formula as a starting point, then adjust the allocations based on your own personal tolerance.
Final Thoughts on What is a Bond
So there you have a high altitude view of bonds.
As you can see, bonds are probably more complicated than most people believe. They come in different shapes and sizes and are issued by various entities. Each has its own strengths and limitations.
Armed with just a general understanding of bonds, you should be able to appreciate the need to hold at least some part of your portfolio in them. Most investors don’t hold individual bonds since it’s difficult to adequately diversify.
Bond funds are usually the better choice for small investors, particularly if you’re interested in specialized bonds, like municipal bonds or high yield bonds.
One final word on bonds…if you’re looking for an asset that’s totally safe, bonds may not qualify.
They are subject to the risks discussed above, despite being less risky than stocks.
But if you want complete safety for at least part of your portfolio, then you’ll need to look at CDs, money markets, and high yield savings accounts.
A government debt default could send mortgage rates to highs not seen in over 20 years, a new Zillow analysis suggests.
The unprecedented scenario would send mortgage rates as high as 8.4% in September and the typical cost of a mortgage up 22%, the real estate platform’s analysis found. The Treasury Department has suggested the U.S. would fail to meet its debt obligations as soon as June 1, a situation which would significantly disrupt the housing market.
Mortgage rates could soar past 8% in the unlikely government default scenario, said Melissa Cohn, a regional vice president at William Raveis Mortgage, in an email to National Mortgage News. The rate for average 30-year fixed loans has hovered above 6% in the past six months, after momentarily rising above 7% last fall. The average hasn’t surpassed 8% since August 2000, according to data from the Federal Reserve.
“A government default would depress Treasury bond prices, causing bond yields to rise significantly,” she wrote.
The spread of 3-month Treasury yields over 1-month Treasury yields, a barometer of mortgage rates, reached 1.78 percentage points since April 21; the previous high was 0.79 points last October, Zillow said.
“The gap suggests that investors were requiring much higher interest rates on debt maturing this summer, compared to debt maturing in May, likely due to the risk of delayed or reduced repayment in the event that Treasury hits the X-date without Congressional action on the debt ceiling,” wrote Jeff Tucker, Zillow senior economist, in the company’s analysis.
One-month Treasury yields have since climbed to 5.5%, reflecting the looming X-Date, Zillow said.
If a divided Congress fails to raise the debt ceiling by the “X-Date,” or the day when the government runs out of money, home sales would also drop, Zillow said. Existing sales volume, the firm said, would fall 23% to a seasonally adjusted annualized rate of 3.3 million in September from April’s 4.3 million rate.
Specifically, 700,000 fewer homes would be sold between this July and December 2024 in the event of a default, or 12% of the 6 million sales projected in a market without a government default, according to Zillow. Home prices in the scenario meanwhile would remain insulated by low inventory and buyers remaining on the sidelines with elevated rates, dropping by just 1% through next February.
Zillow puts the average home price at $334,269, a 5% year-over-year gain. Property value growth exploded last summer but has since relaxed, rising at a decade-low pace as of March.
Prices, however, could be dampened by a wave of unemployment, as a federal debt default would put government employees out of work temporarily or permanently. Under the default scenario, Zillow projects unemployment peaking at 8.3% in October.
A government default would mar the country’s credit rating and affect the value of the U.S. dollar, along with disrupting the approximately 9 million Americans who rely on federal wages or funding. The U.S. has never defaulted on its debts.
While the scenario is worrisome, most people don’t expect it to happen, Cohn suggested.
“I don’t get a sense of great concern from people,” she wrote. “Everyone hopes this will not occur as the damage to the economy would be great.”