Yield competition is the new new thing for the fixed-income market. With inertia dominating trading in the benchmark 10-year Treasury Note of late, yield-hungry investors who think bond traders are asleep at the switch may be inspired to look for more alluring quarry elsewhere.

As it happens, there’s opportunity for improving one’s fixed-income status these days. Yields for 10-year municipal bonds, for example, are nipping at the heels of the 10-year Treasury. The national average for investment-grade A-rated investment-grade muni bonds yesterday was 4.2%, according to, a muni broker. That’s a mere 23 basis points below the 10-year Treasury’s current yield of 4.23%, according to Bloomberg data. In fact, that tax-free muni yield may actually be higher relative to the Treasury Note after adjusting for the IRS pinch that accompanies the federal government’s debt.
Meanwhile, taxable short-term instruments are looking more competitive these days as well. Consider the national average for five-year certificates of deposit, which currently offer a 4.16% rate, reported That’s just seven basis points below the 10-year Treasury’s yield, and it comes with a lock-up period of half the time.
Meanwhile, the Treasury’s pre-scheduled adjustment on November 1 for inflation savings bonds promises to be another yield-enhancing experience for investors considering the choices in the fixed-income realm. The current I-bond rate is 4.8%, advised But after the November 1 adjustment, which factors in the inflation rate of the previous six months, the new I-bond yield will jump to 6.9%, said Dan Pederson, author of “Savings Bonds: When to Hold, When to Fold and Everything In-Between,” via
Because inflation has marched higher in recent months, based on the consumer price index, the I-bond will reflect the trend with higher yields. The CPI advanced 4.7% during the 12 months through September, sharply higher from the 3.3% rise reported for 2004, for example.
Money market rates are still materially lower than the 10-year Treasury’s current yield, though not by much if you’re willing to shop around. The national average yield for bank money market accounts is a paltry 2.22%, according to, although a look at individual institutions reveals a wider range yield choices among banks, including one as high as 4.03% at one relatively generous outfit.
In fact, the plain vanilla money market fund is positioned to become an increasingly popular item for the foreseeable future if the Federal Reserve keeps raising rates. To judge by trading in the Fed funds futures market, such a future seems likely. The March 2006 contract, for example, is priced for a 4.4% Fed funds rate, or significantly higher than the current 3.75%.
True, money market rates are relatively low compared to long-term fixed-rate debt securities. But money market funds enjoy a trait that promises to among the more popular devices in the financial universe for the foreseeable future: a yield that keeps pace with the trend du jour with the overall price of money. Don’t try that with your conventional Treasury Note.