The price of playing it safe
The price of playing it safe
Central bank interest rates in the US and the UK look set to fall again in the coming months. Whilst they are around a percentage point below peak rates a year ago, the current rates of 4% and above have continued to provide investors with attractive returns from cash deposits and money-markets funds with relatively low risk. If the central banks on either side of the Atlantic reduce rates further, in line with market expectations due to slowing economic growth and lower inflation in both economies, then cash yields will also fall.
Interest rates in the UK and US
Source: Artorius, Bloomberg
With the prospect of lower returns from cash and money-market funds, investors may be looking at their options to mitigate this loss of interest income. A broad search for other yield options provides a range of solutions but each with varying degrees of risk. Options include equity income, which offers dividends but carries the volatility and downside risk of equities, and fixed income, which provides contractual debt repayments and is generally less risky than equities, though still subject to credit and interest rate risk. Alternatives such as infrastructure or private credit may also generate yield, but they bring higher risk along with liquidity and complexity considerations that investors must weigh carefully.
Markets price in more Federal Reserve interest rate cuts
Source: Artorius, Bloomberg
Credit where it’s due
Cash and money-market fund returns adjust almost immediately when central banks reduce interest rates. Based on market expectations, this means a potential decline of around 2 percentage points over the next year, leaving cash rates below 3%. While some investors may look to equities as an alternative source of income, equity income is closely tied to business performance and the company’s ability to sustain dividends, which introduces a higher degree of business and market risk. Instead, fixed income provides a more structured way to generate income, with returns based on contractual debt repayments rather than corporate profitability.
Within fixed income, credit quality is a key measure of risk, reflecting an issuer’s ability to meet its debt obligations. Rating agencies such as S&P and Moody’s assess this and grade bonds on a scale, with investment grade ratings ranging from AAA (highest quality, lowest risk) down to BBB, and high yield ratings from BB through to C/D for distressed or defaulted debt. In short, higher credit ratings signal stronger balance sheets and lower default risk, while lower ratings tend to perform worse in times of economic shock and distress.
Currently, US high yield bonds are offering yields of roughly 6.5%, which can be locked in at purchase and maintained through the term, regardless of any changes in interest rate (although default risk still exists). Short-dated maturities are particularly effective as they combine this elevated income with lower sensitivity to interest rate changes. This makes them less volatile than longer-dated high yield bonds and allows investors to capture attractive yields. On a risk-adjusted basis, short-dated high yield bonds can therefore compare favourably with other income producing options.
There are perks to being short
Periods of market stress have repeatedly underlined the importance of diversification and credit quality mix. For example, in the 2007-09 financial crisis high yield bonds fell sharply (~-35%), while 10-year US Treasuries rallied (~15%) as investors sought safety. The Covid pandemic shock in 2020 reflected a similar story.
More recently, the 2022–23 interest rate rises in the US produced a different dynamic. Investment-grade bonds, which generally carry longer redemption dates, fell more than high yield bonds at the trough (~-21% vs ~-15%) and took longer to recover. The shorter redemption dates of high yield bonds, together with the income generated from interest payments, can help support a quicker recovery in total returns. Other asset classes, notably equities, also experienced significant volatility in those periods, reinforcing the value of diversification and risk management across an investor’s entire portfolio.
Greater returns for US High Yield bonds
Source: Artorius, Bloomberg
Slower recovery for investment grade bonds
Source: Artorius, Bloomberg
Balancing risk, reward and reality
Falling interest rates reduce the income that can be earned from cash and money-market funds. As interest rates move lower, investors who previously relied on cash flows from these holdings may want to look towards other areas of the market. Options often considered in this context include equity income funds, yield-oriented structured products and fixed income solutions, each with different patterns of return, liquidity and risk.
Short-dated high yield bonds sit within this landscape as one potential way of maintaining income when cash yields decline, bearing in mind the increase in credit and interest rate risk. Any exposure to bonds should be considered in the context of an investor’s overall portfolio and taking into account their income requirements and attitude to risk.
Mark Christie
Investment Analyst
*Any feedback provided can be anonymous
Important Information
All expressions of opinion reflect the judgment of Artorius at 26th September 2025 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions.
Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
FP20250926001