Use Short-Term Corporate Bonds Like These 4 To Wait Out The Fed’s Coming Rate Hikes

It’s now official, the Federal Reserve is loading up for its anti-inflation rate increases.

The Fed’s reasoning for raising interest rates is well documented. The question is, how best to deal with it in your investment portfolios? Should you adapt a bunker mentality and just sit in cash? Maybe purchase T-bills yielding almost nothing? No and no.  

Short-term corporate bonds yield what money market funds used to yield years ago. Although short-term corporate bonds are not as liquid, they can serve a purpose as the Fed waiting game begins.

Credit quality within the corporate bond sector has improved a lot. Corporate America’s deleveraging resulted in improved balance sheets so bond safety is better. And, for those corporations that didn’t deleverage much, they certainly called or tendered high coupon bonds and refinanced to lower yielding bonds, making their debt service more manageable.

Here are four suggestions to live through the Fed’s waiting game. Kinder Morgan, the pipeline and energy storage company, has bonds with 3.5% coupons maturing January 15, 2023 (CUSIP: 49456BA73) rated Baa2 by Moody’s, BBB by S&P and Fitch. Depending on your purchase price, these bonds yield between .75% to 1.00%. Not a yield  bonanza but way better than money market funds at .01%.

Microchip Technology, the company that manufactures and markets microcontrollers, mixed signal analog, and Flash-IP integrated circuits, has bonds with a 4.333% coupon that matures June 1, 2023 (CUISP: 595017AP9). These are first lien bonds rated Baa2, BBB-. They yield approximately 1.65% to maturity.

Reliance Steel’s 4.50% bonds due April 15, 2023 yield between 1.46%-2.00% depending on the price you pay (CUSIP: 759509AE2) and are rated Baa2, BBB, BBB+.

Williams Companies is an energy infrastructure company that owns and operates midstream gathering assets and natural gas pipelines, to name a few of their specialties. Williams has a $1 billion bond issue, (CUSIP: 96950FAM6) 4.30% due March 4, 2024, callable December 4, 2023 yielding 1.64% to the call and 1.94% to maturity. It is rated Baa2, BBB, BBB and has a strong balance sheet with positive free cash flow.  

With inflation running 7%, earning 1.64% isn’t great but it’s better than the measly 1 basis point the brokerage firms pay for storing your cash.

The longer inflation stays elevated and your money sits in cash, the faster your purchasing power erodes. So do something about it. There will come a time when bond yields of all types become attractive again. Beat what your money market pays while waiting.