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You already understand treasury bonds, know the difference between savings accounts and CDs, and your emergency fund is in the right place. What’s next? The natural progression in fixed income investing is corporate bonds, mortgage-backed securities, asset-backed securities, and other advanced instruments — products that offer higher yields, but with characteristics and risks you need to understand before investing.
Advanced fixed income isn’t for beginners. But if you have a solid foundation and want to extract more from your conservative investments, this guide will show you the way. Without overcomplicating what’s simple and without oversimplifying what deserves attention.
Let’s understand each instrument, its risks, advantages, and when it makes sense to include them in your portfolio.
Corporate Bonds: Lending to Companies
What They Are
Corporate bonds are debt instruments issued by companies. When you buy a corporate bond, you’re lending money to a company in exchange for interest — just like treasury bonds are a loan to the government.
The crucial difference: risk. While government bonds are backed by the full faith and credit of the government, corporate bonds depend on the financial health of the issuing company. If the company goes bankrupt, you could lose part or all of your investment.
Types of Corporate Bonds
| Type | Characteristic | Key Feature |
|---|---|---|
| Investment-grade | Issued by financially strong companies | Lower yield, lower risk |
| High-yield (junk bonds) | Issued by riskier companies | Higher yield, higher risk |
| Convertible bonds | Can be converted into company stock | Equity upside potential |
| Municipal bonds | Issued by local governments | Often tax-exempt |
Tax-Exempt Bonds: The Star of Fixed Income
In many jurisdictions, certain bonds offer tax advantages that can make them more attractive than taxable alternatives, even at lower nominal rates.
For example, in the US, municipal bonds are exempt from federal tax (and sometimes state tax). In Brazil, infrastructure bonds (“debentures incentivadas”) are tax-exempt for individual investors.
Comparative example:
- Tax-exempt bond: 5.0% yield (net = 5.0%)
- Taxable CD: 6.0% yield (net after 25% tax = 4.5%)
In this case, the tax-exempt bond wins despite a lower nominal rate.
Risks of Corporate Bonds
- Credit risk: The company might default. Check the credit rating (AAA is the safest)
- Liquidity risk: Not all bonds have active secondary markets. It can be hard to sell before maturity
- Interest rate risk: Bond prices fall when interest rates rise
- No deposit insurance: Corporate bonds are NOT covered by deposit insurance schemes like FDIC
Mortgage-Backed and Asset-Backed Securities
What They Are
- MBS (Mortgage-Backed Securities): Bonds backed by pools of mortgage loans
- ABS (Asset-Backed Securities): Bonds backed by other types of receivables (auto loans, credit card debt, agricultural receivables)
In practice, they work like this: a financial institution has receivables from borrowers (mortgage payments, for example). It packages these receivables into a security and sells it to investors, who receive the interest payments.
Advantages
- Often offer yields above government bonds
- Backed by real assets (property, equipment, crops)
- Diversification beyond traditional bank deposits
Risks
- Credit risk: If the underlying borrowers default, cash flow is compromised
- Concentration risk: May depend on few debtors or a single sector
- No deposit insurance
- Low liquidity: Can be difficult to sell on secondary markets
- Complexity: Structure is harder to understand than a simple CD
When They Make Sense
These securities make sense for investors who:
- Want to diversify beyond bank products
- Accept longer terms (typically 3 to 10 years)
- Seek tax advantages where available
- Have emergency funds and liquidity covered by other investments
Senior and Subordinated Bank Debt
What They Are
Larger banks issue senior notes and subordinated debt to raise long-term capital. These instruments typically require higher minimum investments and longer commitments than standard CDs, but offer better rates in return.
Characteristics
| Feature | Detail |
|---|---|
| Minimum term | Typically 2-5 years (no early redemption) |
| Minimum investment | Often $50,000-$250,000 |
| Yield | Generally above comparable CDs |
| Deposit insurance | No (unlike regular CDs) |
| Tax treatment | Taxable interest income |
Who Should Consider Them
These instruments are for investors with larger portfolios who won’t need the money for at least 2-5 years. If you have significant capital available and want fixed income with better rates, it could be an option — but evaluate the issuing bank’s creditworthiness, as there’s no deposit insurance.
How to Analyze These Investments
1. Credit Ratings
Agencies like Fitch, Moody’s, and S&P assign credit ratings to issuers:
| Rating | Meaning | Risk |
|---|---|---|
| AAA | Exceptional quality | Minimal |
| AA | Very high quality | Very low |
| A | High quality | Low |
| BBB | Investment grade | Moderate |
| BB or lower | Speculative grade | High |
Practical rule: For most investors, stick with issuers rated AA or above.
2. Term and Liquidity
Before investing, ask:
- Can I hold until maturity?
- Is there a secondary market to sell before maturity?
- What’s the bid-ask spread on the secondary market?
3. After-Tax Yield
Always compare the after-tax yield between different instruments:
- Taxable bonds: Gross rate minus tax
- Tax-exempt bonds: Rate equals net yield
- CDs: Gross rate minus tax (but may have deposit insurance)
The after-tax comparison is what matters, not the headline rate.
4. Diversification
Don’t put all your fixed income in a single issuer. Diversify across:
- Different sectors (banks, infrastructure, real estate, agriculture)
- Different terms (short, medium, long)
- Different rate types (fixed, floating, inflation-linked)
Building an Advanced Fixed Income Portfolio
A suggested allocation for those ready to advance:
| Component | % of Fixed Income | Purpose |
|---|---|---|
| Government bonds / liquid CDs | 20-30% | Reserves and liquidity |
| Medium-term CDs | 20-30% | Returns with deposit insurance |
| Tax-exempt bonds | 15-25% | Tax efficiency + spread |
| MBS and ABS | 10-20% | Diversification + yield |
| Senior bank debt | 5-15% | Premium rates (if you have the capital) |
This is just a reference. Your ideal allocation depends on your goal timeline, risk tolerance, and liquidity needs.
How Monely Can Help
Investing in advanced fixed income requires tracking multiple maturities, rates, and issuers. Monely helps you maintain control:
Financial goals: Set goals for each objective (retirement, home purchase, travel) and track how much you’ve allocated to each. This helps you decide when to invest in longer-term instruments.
Portfolio charts: Monitor the evolution of your contributions and visually see how your investment portfolio is growing over time.
Conclusion
Advanced fixed income offers real opportunities to boost your portfolio’s returns, especially with tax-exempt instruments where available. But it comes with more risk than government bonds and standard bank products.
The key is to understand each instrument, diversify across issuers and terms, and never invest in something you don’t understand. Start with highly-rated corporate bonds — they’re the most natural entry point for those wanting to go beyond the basics.
And remember: advanced fixed income is for money you won’t need in the short term. Your emergency fund and liquidity needs should be in simpler, more accessible instruments.
Next steps: Organize your investments in Monely with clear financial goals. This way, you’ll know exactly how much to allocate to each type of investment and track your progress toward your objectives.