As of February 2021, the average savings account pays 0.07% (APY). Many of the country’s biggest banks pay less than that. As we move up the risk spectrum, the returns do not look much better. The SEC yield on the Vanguard Total Bond Market Index Fund (MUTF:VBMFX) is just 1%, similar to the yield on 10-year Treasury notes.
Unfortunately for bond investors, the actual level of interest rates is still quite low by historical standards. That means that if you buy Treasury notes or bonds of any maturity at current yields, you are likely locking in returns that will lag the rate of inflation.
Structured income notes could play a vital role for a portfolio in the current low interest rate environment. Institutional investors have been using structured notes to create considerable yield in portfolios for decades. Only recently with technological advances have these strategies been available to retail investors. A structured note is a debt obligation that also contains an embedded derivative component that adjusts the security’s risk-return profile. Large banks are able to use baskets of options to define specific outcomes for investors often with high levels of income and large protection barriers on principal. Typically, the higher the volatility in the market, the better the terms on these notes become.
Join South Coast as we discuss how to use structured income notes in the search for yield.