Searching for income in today’s market environment has become significantly easier over the past year, as the Federal Reserve (Fed) raised interest rates by 5.25% since early 2022.

Consider short duration bond funds

While returns on savings and money market accounts have improved considerably over the past year, investors with a longer-term outlook may want to consider some other appropriate options—particularly if you’re willing to take on some credit risk.

For example, the Thrivent Limited Maturity Bond Fund (THLIX) has a very short duration (low interest-rate risk) and has recently offered a yield of 4.96%. The portfolio enhances yield with a diversified portfolio including securitized debt, such as government-guaranteed residential mortgage-backed securities and high-quality structured securities with underlying assets such as corporate and student loans. It also invests in short-term, investment-grade corporate bonds.  

The yields for this Fund and the others discussed in this article are based on the distributions paid and the net asset value of the fund. Yields quoted here are “30-day SEC” yields calculated based on the previous 30 calendar days ending July 31, 2023.ⁱ  For the most recent yields on all Thrivent Mutual Funds fixed-income funds, see: Thrivent Mutual Funds Fixed Income Options.

Seeking higher yields

The same thinking applies to investors who are looking for higher yielding opportunities. One example is Thrivent Opportunity Income Plus Fund (IIINX). This Fund has relatively short duration (three years) and has recently offered a yield of 5.32%.

A bit more than one-fourth of the Fund is invested in floating-rate leveraged loans, which are bank loans to lower-quality U.S. corporations. They offer a higher yield to compensate investors for greater credit risk, such as possible defaults. The Fund also invests in a diversified mix of securitized debt, emerging-markets debt, and corporate bonds, including high yield. Many of these investments carry more credit risk than interest rate risk. We focus on mitigating that risk by conducting extensive research and by diversifying our holdings.

You might also consider a moderately conservative allocation fund, such as Thrivent Diversified Income Plus Fund (THYFX), with about a 20% allocation to equities and a fixed-income allocation that seeks to provide more income than traditional bond funds. It was recently offering a yield of 4.13%.

Another approach to balancing interest-rate and credit risk can be seen in Thrivent Income Fund (LBIIX), which invests primarily in investment-grade corporate bonds. The Fund gets a yield boost by investing in high-yield bonds and other asset classes opportunistically, such as floating-rate leveraged loans and emerging-markets debt. The Fund has less credit risk than Thrivent Opportunity Income Plus Fund but has more than double the duration (seven years). Its recent yield was 5.29% (see current yield).

Moving along the credit risk spectrum

Further out in the credit risk spectrum would be a high yield-bond fund. Thrivent High Yield Fund (LBHIX) invests predominantly in high-yield corporate bonds. For that higher credit risk, it has traditionally paid a higher yield than Thrivent Income Fund (it was recently yielding 7.42%; see current yield). We prefer the middle area of the high yield market—B rated bonds—over higher risk CCC bonds (using the lower of the bond ratings assigned by Moody’s Investor Services, Inc., or Standard & Poor’s^® Financial Services, LLC), because we think the risk tradeoff is better. 

Alternative income strategies can also enhance yield by carefully choosing credit risk opportunities. Thrivent Multidimensional Income Fund (TMLDX) invests in a broadly diversified set of higher yielding debt, including preferred securities. “Preferreds” combine features of debt and equity, in that they pay fixed dividends, but can have a higher potential to appreciate in price and do not have a stated maturity date. The Fund also invests in closed-end funds and convertible bonds (bonds convertible into equity), both of which carry higher equity-like risk and offer higher potential returns than traditional bonds. The Fund has a relatively short duration of more than four years and was recently paying a yield of 5.19% (30-day SEC yield pre-waiver was 4.87%.ⁱⁱ). (See current rate.)

Don’t forget munis

Finally, if you are in a high tax bracket or live in a high-tax state, you may want to consider a municipal bond fund. Municipal bonds are bonds issued by state and local governments to finance public projects such as roads, bridges, schools, and hospitals. The interest they pay is exempt from federal taxes and, in some cases, from state taxes, although any capital gains distributions, as well as realized capital gains from selling fund shares, may be taxable. For certain investors, their after-tax yields can be significantly higher than for other types of bonds.

For example, Thrivent Municipal Bond Fund (TMBIX) was recently paying a yield of 3.57%. (See current rate.) (30-day SEC yield pre-waiver was 3.52%.)ⁱⁱ The tax-equivalent yield can be significantly higher (as compared with taxable bond funds), as the graph below illustrates:

We believe that it also makes sense to take strategic credit risks in the municipal market, since default rates historically are lower than in the corporate bond market.

For example, Thrivent High Income Municipal Bond Fund (TMBIX) has recently paid a higher yield of 4.22% (30-day SEC yield pre-waiver was 3.61%)ⁱⁱ, which may compare favorably to other fixed-income options on a tax-equivalent basis (see current rate).

While fixed-income yields are still low by historic standards, income-seeking investors can get more return on their investments by taking measured, diversified risks in credit.

The following charts shows the 1-, 5-, and 10-year annualized returns of each of the Thrivent Funds fixed income funds discussed in this article (View Fixed Income Yields PDF here).

Performance data cited represents past performance and should not be viewed as an indication of future results. Investment return and principal value of the investment will fluctuate so that an investor's shares, when redeemed may be worth more or less than the original cost. Current performance may be lower or higher than the performance data quoted. Call 800-847-4836 or click here for performance results current to the most recent month-end.

The concepts presented are intended for educational purposes only. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product. 

The information provided is not intended as a source for tax, legal or accounting advice. Please consult with a legal and/or tax professional for specific information regarding your individual situation.