Where to Earn More Than Money Market Funds Amid Falling Rates
Recent stock market declines are driving investors toward conservative assets. While money market funds offer lower returns following rate cuts, alternative options like target-maturity bonds and fixed deposits present new yield opportunities.
Recent declines in the stock market are prompting investors to seek yields in more conservative assets, raising the question of where higher returns can be achieved without significantly increasing risk. Over the past year, 33 shekel money market funds delivered a median return of about 3.8%. Following the Bank of Israel's decision to lower the interest rate from 4.5% to 3.25%, the annual return on money market funds is now estimated at around 3.3%.
In contrast, 95 managed government and corporate bond funds without equities delivered a median return of just 2.66%, while 98 managed corporate bond funds without equities yielded roughly 2.8%. Government bond funds combining fixed-rate and CPI-linked bonds showed a median return of 2.58%. Consequently, while investors in bond funds took on additional interest rate and credit risks, their median returns fell below those of money market funds.
Management fees explain part of these gaps: 0.18% at the median for money market funds and 0.15% for tracking funds on short-term government bonds, compared to 0.62%-0.76% for managed bond funds. For conservative investments, these differences are substantial. Furthermore, unlike money market funds in banks that are exempt from purchase, sale, and custody fees, bond and tracking funds may incur custody, buying, and selling commissions.
Where to Find Higher Yields
A preferred alternative to managed bond funds is holding shekel-denominated government bonds with a maturity matching the investment horizon. Currently, a two-year government bond offers about 3.4% to maturity, while a five-year bond offers roughly 3.9% before tax. Another option is bond funds with a defined maturity year, such as 2028 or 2029, which invest in baskets of bonds maturing around a specific target year.
Target-maturity funds tracking 2029 bonds achieved a median return of 4.65%, outperforming money market funds. However, for investors entering the market today, the current yield to maturity is more critical than past performance. The index for shekel bonds maturing in 2029 saw its yield rise to 4.76% in early November, offering a spread over comparable government bonds of 1.36% before costs and credit losses.
Corporate Bonds and Fixed Deposits
Another alternative for investors willing to take on credit risk is tracking funds focusing on Tel Bond indices, providing diversified exposure to corporate bonds with relatively low management fees. The fixed-rate Tel Bond index currently displays a yield to maturity of about 5% gross, whereas the CPI-linked Tel Bond 60 index offers a real yield to maturity of roughly 2.6%-2.7%.
Additionally, fixed-rate bank deposits allow investors to lock in interest rates in advance, albeit sometimes at the cost of liquidity. The Bank of Jerusalem offers a one-year fixed-rate deposit at 3.25% for customers of all banks, compared to lower rates at other major institutions. While money market funds remain an attractive solution for liquid capital, recent market declines have improved yields to maturity across several fixed-income channels, creating better entry conditions than last year.
