Rising Rates Push Investors Beyond Traditional Bonds for Income
fixed income
Investments designed to provide scheduled interest or income payments.
catastrophe bonds
Bonds that transfer some natural-disaster risk to investors.
merger arbitrage
A strategy that seeks the price gap around a company merger.
Bond markets have become more volatile as interest rates rise. Some investors are reducing exposure to traditional fixed income. Advisers still say bonds belong in a diversified portfolio. A September 10 CNBC report describes the alternatives under consideration. They include ultra-short bonds, catastrophe bonds, dividend stocks, real estate investment trusts, merger arbitrage, and asset-backed lending. Read the CNBC report.
What is changing
The shift is not simply a hunt for the highest yield. Inflation, geopolitical concerns, and rising rates have made bond losses harder to ignore. Some advisers are moving toward lower-duration choices, such as ultra-short bonds. Others are adding non-bond assets that can produce cash flow. The shared goal is broader income sources.
Alternatives near fixed income
Insurance-linked securities are one example. Catastrophe bonds let insurers, reinsurers, and governments transfer some natural-disaster risk to capital-market investors. Investors may receive mid-to-high single-digit returns. They can also lose money after an unusually severe disaster. Claims would then require large insurance payments. The report says one advisory firm puts 3% to 5% of its portfolios into cat bonds through mutual funds.
Asset-backed lending is another route. Some private-market managers lend against real assets. Examples include rail cars, gas-producing wells, and other hard collateral. These loans often last one to three years. That is shorter than typical investment-grade bonds. One adviser cited tax-deferred yields of 6% to 10%. This approach brings liquidity risk. Collateral may lose value. Collection may also become difficult.
Equity and trading strategies
Dividend-paying stocks, REITs, preferred stocks, master limited partnerships, and covered-call ETFs can provide income. They are not direct bond replacements. Stock prices can fall. Some of these assets are also sensitive to interest rates. Publicly traded REITs are repriced constantly. Their prices can move more than bond prices.
Master limited partnerships often invest in energy infrastructure. They can offer high distributions. One adviser was less enthusiastic while Treasury yields were much higher than in 2021.
Merger arbitrage seeks the gap between a merger announcement price and its expected closing price. It may reduce exposure to interest-rate risk. Its upside is limited. Losses can be much larger if the deal fails.
What the report confirms
The report presents a broad menu. It does not identify one winning substitute for bonds. It gives dated examples. One MLP ETF showed a 6.82% SEC yield on September 4. One preferred-stock ETF showed 6.52% on July 31. These were market snapshots. They were not promises of future returns.
What remains unknown
The article does not establish which choice fits a particular investor. It does not show full portfolio comparisons or after-tax results. Fees, access rules, and liquidity can differ widely. The report also cannot show how every strategy would behave during the next market shock.
What to watch next
Investors will watch inflation, interest rates, and bond performance. They will also watch whether alternative products keep paying income. Moving beyond bonds may diversify income. It does not remove risk. It changes the kind of risk an investor carries.
Why Investors Are Looking Beyond Bonds
📰 Full story: Rising Rates Push Investors Beyond Traditional Bonds for Income
Higher rates are making ordinary bonds harder to rely on for income.
catastrophe bonds
Investments that pay for taking on some disaster risk.
REITs
Companies or funds connected to real estate.
SEC yield
A standard income measure used to compare many funds.
💡 The gist
- Rising rates have made many ordinary bonds harder to hold.
- Investors are exploring stocks, insurance products, and loans.
- More income often means accepting more risk.
Bond income usually comes from interest payments. But bond prices can fall when rates rise. The CNBC, a business news outlet, report says investors are searching for other ways to earn cash. Read the report.
Why investors are looking elsewhere
The report describes a difficult bond market. Inflation and geopolitical worries are adding uncertainty. Some advisers still recommend keeping bonds in a diversified portfolio. They are shifting part of that exposure toward ultra-short bonds. These bonds mature sooner and may react less to rate changes.
Other advisers are adding non-bond investments. Their goal is broader income sources. This does not mean they found a safe replacement. It means they are changing the mix.
The choices
Catastrophe bonds connect investors with insurance risks. Insurers can pass some disaster risk to investors. Investors may earn mid-to-high single-digit returns. They can also lose money after an unusually severe disaster.
Dividend stocks pay shareholders from company profits. Their prices can fall. REITs are companies or funds linked to real estate. They can pay dividends. Their prices can move more than bond prices.
Preferred stocks and master limited partnerships can also pay regular income. Covered-call ETFs are another reported option. These choices can be sensitive to interest rates. MLPs often focus on energy infrastructure.
Merger arbitrage follows a merger deal. It seeks the gap between today’s price and the possible final price. The gain is limited. The loss can be large if the deal collapses.
Some private lenders use valuable assets as collateral. Examples include rail cars and gas-producing wells. These loans often last one to three years. One adviser cited possible tax-deferred yields of 6% to 10%. But selling may be difficult. The collateral may also lose value.
What to remember
The report lists options. It does not name one best choice. A high yield is not free money. It can signal more price, disaster, interest-rate, or selling risk.
The report gives dated examples. One MLP ETF showed a 6.82% SEC yield on September 4. One preferred-stock ETF showed 6.52% on July 31. These were snapshots. They were not promises.
The next clues are inflation, interest rates, and bond performance. Investors will also watch whether these alternatives keep paying income. The key question is not only how much they pay. It is what risk comes with that payment.
Finding New Ways to Get Money
📰 Full story: Rising Rates Push Investors Beyond Traditional Bonds for Income
The usual money-lending path is wobbly, so people are looking around.
bond
A promise about money someone borrowed.
interest
A little extra money paid back on a loan.
dividends
Small payments that some companies give shareholders.
What happened
A bond is a promise about borrowed money. Someone lends money to a country or company. The borrower pays back a little extra. That extra money is called interest.
Interest rates are rising. Bond prices are wobbling. So some money managers want different income paths.
CNBC, a business news company, described these choices. See the report.
Some different paths
Some people use very short bonds. Some use shares that pay dividends. Dividends are small payments from companies. Some use groups connected to real estate. Those groups can share money from rent.
Some use insurance-linked bonds. These can lose money after very big disasters. Some lend money against useful things. Those things can include train cars or gas wells. Some wait for company deals to finish. A deal can fail, causing a bigger loss.
The important idea
A bigger payment can hide a bigger worry. A share price can fall. A disaster can happen. A loan may be hard to sell.
These paths are not magic money machines. They simply move the worry somewhere else. The report does not say one path is best. People are spreading their money around. They are watching rates, prices, and payments.