CHICAGO -- Conservative savers who need income with safety are increasingly biting the bullet: giving up the security of certificates of deposit or money market funds for more risky investments paying higher yields.
A look at CD rates clearly paints a gloomy picture. The average one-year CD yield paid by 100 large banks and thrifts has fallen from 7.14 percent in January to 4.85 percent this month, according to surveys by Bank Rate Monitor.
"You can't blame the consumer for wondering what has happened," said T. Scott McCartan, senior vice president of the personal investment department at First National Bank of Chicago.
"They've been used to CDs and money market funds paying high rates and having a high degree of safety," he said. "The safety is still there, but their income has dropped."
So, investors have been looking at longer maturities to get higher yields. But he believes the stage is being set for renewed inflation as the government and the Fed overshoot in worrying about recession.
Investors also are shifting into corporate bonds where quality is lower and the risk of default is higher. He said that mutual bond funds and stock funds have been growing at a fast rate and that money is flowing out of money markets and CDs.
The stock market could be the answer for investors facing the sticker shock of low rates in CDs or money market funds, as long as they are fairly comfortable financially and have no big obligations coming up, according to Samuel Kahan, chief economist for Fuji Securities Inc.
"That is, in the context of economic growth I expect, which won't be the average 3 percent a year recorded since World War II," he said. "Still, it will be better than the recession-gloom scenarios that are prevalent."
John Markese, executive vice president of the American Association of Individual Investors, said that where safety is the overriding concern, as with smaller, more conservative investors, the alternatives to insured CDs are limited.
Short-term Treasuries are paying even lower rates, as are mutual funds that invest in those securities, he noted.
Longer-term Treasuries -- of five- to 10-year maturities -- offer better rates, but at the risk of lower prices if and when inflation returns and the securities have to be sold.
In Monday's Treasury auction, the yield on three-month T-bills fell to 3.75 percent, its lowest level in 19 years. As recently as Oct. 22, the yield was above 5 percent.
While funds invested in foreign government securities pay higher rates, there is more risk for the investor than may be acceptable.
But that is one place where money is flowing. For example, one of the largest mutual fund companies, Fidelity Investments, reports shifts to the short end of the bond market to receive yields of 7 percent to 8 percent.
"Our Spartan Limited Maturity Government Fund has grown in a short period from $100 million to $2 billion," said Tracey Gordon ,, of Fidelity. It invests in U.S. government or agency securities (such as Ginnie Maes) and foreign government-backed securities that have maturities of three to five years. Other big-fund companies such as Vanguard have funds that invest in Ginnie Mae securities.
The company also started another fund six weeks ago, the Fidelity Short Term World Income Fund, which invests in higher yielding foreign government securities that have maturities of less than three years. The countries include Germany -- where interest rates were raised last week -- Australia, New Zealand and Finland.
More adventurous investors "who have their roller skates on" could find foreign securities funds attractive at current high rates, Mr. Kahan said. "The good news is that the rates are likely to fall, increasing the price, plus the fund increases in value as the dollar weakens. The bad news is that the dollar eventually will strengthen and investors will have to move fast to get out."
Mr. Kahan believes shorter-term rates should stay level or rise a little as the economy rebounds. Looking at longer-term rates, particularly the 30-year Treasury bond, now at 7.5 percent, he thinks it may drop to 7 percent in 1992, but bounce back to 7.5 percent by the end of the year.
"There won't be a return to double-digit rates unless there is a pro-inflation policy, and that's not in the cards," he said.
Mr. Markese said municipal bond funds make sense for high-income individuals, but the risk of a default or rating downgrade is too high for most conservative investors. Utility stocks pay a relatively high rate and are easy to sell, but there is no guarantee the dividend won't be cut.
Mr. Markese said one comfort zone alternative for CD investors is to establish a ladder: one-, two- and three-year maturities. As the CD matures, it can be rolled over into a new three-year maturity at a higher rate for the investor.