In 2023, you could plop money into a high-yield savings account and get a yield nearing 5% with little effort. Expect to work a little harder for those fixed income returns in the new year. The Federal Reserve’s series of interest rate hikes, which kicked off in 2022, made idle money profitable. One-year certificates of deposit are yielding upward of 5% at some online banks, and the Crane 100 Money Fund Index has an annualized 7-day yield of 5.2%. Fed funds futures pricing suggests a chance that the central bank could begin dialing back rates next spring, even though Fed Chair Jerome Powell last week said it’s ” premature ” to speculate on when policy could ease. As a result, it may be time to start unwinding those big cash positions and adopt a longer-term mentality for fixed income investments. “People have been heavily in cash because it pays well and gives them a lot of optionality,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. She noted that those big cash positions expose investors to reinvestment risk – that is, they may wind up reinvesting future proceeds into assets with lower yields. “We have been advocates of adding some duration, and doing so gradually any time yields tick up,” she said. A runup in bond yields is accompanied by a decline in prices, and the two move inversely to one another. Stepping out onto the yield curve Adding duration – that is, buying longer-dated assets that have greater price sensitivity to rate fluctuations – is a way to lock in rates on certain fixed income investments. “Our view is that the intermediate part of the yield curve is really fairly attractive,” said Shannon Saccocia, chief investment officer at NB Private Wealth. Depending on the asset class, this could be a duration of 4 to 7 years, she said. That time frame is similar to Jones’ yield curve sweet spot of 5 to 7 years, as adding too much duration exposes portfolios to dramatic swings in prices as rates fluctuate. High quality munis How investors might add that duration is a different story. For high income investors, municipal bonds offer the prospect of income that’s free of federal income taxes – as well as exempt from state tax if investors live in the same state where the bond was issued. Vanguard’s Tax-Exempt Bond ETF (VTEB) , for instance, has an average duration of 6.6 years and a 30-day SEC yield of 3.75%. The other ETF giant in this space is the iShares National Muni Bond ETF (MUB), which has an effective duration of just over six years and a 30-day SEC yield of 3.62%. “Municipal credit is much, much stronger than other assets,” said Nicholos Venditti, senior portfolio manager on the municipal fixed income team at Allspring Global Investments. “Defaults can occur, but it is very rare.” While the yields are lower on munis compared to corporate bonds, investors should think about their household’s taxes as they figure out whether these are a good deal. To generate a tax-free yield of 3.5%, you would have to find a taxable bond yielding 5.15% if you’re a taxpayer in the 32% tax bracket. Investors must be vigilant about credit quality, too. “On the credit side, being skewed a little higher up toward quality is the right thing to do,” he said. In the municipal arena, UBS likes public higher education bonds. The sector “remains well positioned to maintain its high credit quality, driven by solid state credit quality and strong state financial support, despite soft enrollment trends,” analyst Kathleen McNamara wrote last week. Corporates with strong balance sheets Even as investors remain hopeful of a soft landing and no recession, it doesn’t hurt to stick to corporate bonds issued by companies with sterling balance sheets. “We do like investment grade going into next year,” said Schwab’s Jones. “Investment grade corporates are one of the best risk-reward opportunities.” She also recommends dialing back exposure to high-yield bonds, which have fared well in 2023 but expose investors to credit risk. Indeed, investors can add a little more duration here, too. UBS analyst Barry McAlinden likes the 1- to 10-year maturity space. “The short end (1-3 year) provides low-volatility carry while longer duration (7-10 year) should perform well from a total return standpoint, given [chief investment officers’] view that nominal yields will be lower over the next year,” he said in a report last week. Gradual repositioning Even as investors think about boosting their exposure to duration, they don’t necessarily have to dump their sizeable cash positions in one shot or wait for the right time to make those purchases. Consider dollar cost averaging into those longer-dated positions, incrementally building up exposure to intermediate duration bonds. “Trying to time it and get ahead of when the Fed cuts rates is going to be a difficult thing to do,” said Saccocia. “Focusing on quality and focusing on incrementally adding duration, this is an excellent time to position for the next five years or so.” – CNBC’s Michael Bloom contributed reporting.