Some investments may offer relatively high yields with modest risks. Possibilities include:
Ultra-short bond funds. If you’re in cash, especially money market funds, you’re getting yields that are under 1 percent. By stepping out to slightly longer maturities, you can get a significant amount of extra coupon for taking a little bit of price risk. In late 2003, Morningstar Inc., Chicago, put the average yield for ultra-short funds at 2.4 percent, nearly five times the money fund average.
Bank loan funds and adjustable-rate mortgage funds. Such funds may run into problems with defaults but they also offer the prospect of higher yields, if interest rates rise. Funds that hold senior bank loans generally invest in bank loans to lower-rated public entities. These funds have floating rates so they hedge against the risk of rising interest rates–investors will see some dividend increases if rates move up.
According to Morningstar, bank loan funds have shorter average maturities (one year) and higher yields (3.9 percent) than ultra-short bond funds.
