‘Cash is the tough guy this quarter’: high-yielding savings accounts, treasury bills, money market funds and CDs are where your cash can earn up to 4.5%

Cash isn’t just dollar bills you put in your pocket – in this market, it can seem like a patch of solid ground.

There are several options: people can invest their money in high-yield savings accounts, checking accounts, money market mutual funds, certificates of deposit, and short-term treasury debt.

As a highly reliable alternative to the stock markets, these investment vehicles are able to earn higher returns through higher interest rates. They may sound like hopeful places to store money as recession fears linger and stocks and bonds struggle to recover from the blows of 2022.

According to DepositAccounts.com, high-yielding online savings accounts average 3.3% annual interest rate (APY), up from less than 0.5% a year earlier. Annual online CD averages 4.4% annually, up from nearly 0.6% a year ago, the site says.

According to industry-tracking Crane Data, the average seven-day return for the top 100 money market funds is 4.34%, and hasn’t been this high in over a decade. With a maturity of less than a year, Treasury bills yield 4.5% or more.

Of course, these figures are not ahead of inflation. The annual inflation rate was 6.5% in December compared to a pandemic-era peak of 9.1% in June 2022.

But consider these cash receipts compared to the performance in the stock market. Even with a strong start to January, the Dow Jones Industrial Average, DJIA,
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down over 4% year on year. At that time, the S&P 500 SPX,
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reduced by 9%, and Nasdaq Composite COMP,
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lost almost 17%.

The bulk of the downward pressure came from the rapid increase in the Federal Reserve’s interest rate. The Fed raised its key rate by 25 basis points, a quarter of a percentage point, last week and Chairman Jerome Powell said an additional hike is needed to help pierce inflation.

“There is more interest in cash,” said Meaghan Doe, senior customer research strategist at Edward Jones. “Every time we see market volatility and investments start to feel less secure, cash starts to seem more convenient and safer as a place to put your money.”

Financial adviser Ryan Grazer said he was surprised at how much free cash from clients was waiting to be put to better use. He is not cutting stock and bond offerings, but is investing additional money in short-term certificates of deposit and treasury bills. “Cash is the tough guy these days,” said Grazer, a certified financial planner at Opulus, based in Doylestown, Pennsylvania.

Financial planner Ryan Grazer said he was surprised at how much idle cash clients had waiting to be put to better use.

Take it from Ray Dalio. “Cash used to be trash,” the founder of major hedge fund Bridgewater Associates said in an interview with CNBC last week. “It’s attractive in relation to bonds. It’s really attractive in relation to stocks.”

John Boyd, founder of MDRN Wealth in Scottsdale, Arizona, disagrees. Cash is not trash for him. It is a trap.”

“One of the biggest mistakes I see investors make is ditching depreciated stocks and bond funds to take advantage of higher returns in [high-yield savings accounts]money market funds and even short-term CDs,” he said.

Take advantage of higher fund and reserve rates for a rainy day, Boyd said, but don’t overdo it. Cash still doesn’t have “double-digit upside potential like stocks,” Boyd added.

There are four reasons to keep cash as a liquid asset, Dow said. This is for day-to-day expenses, emergency savings, large upcoming expenses such as a down payment on a house, and part of an investment portfolio.

The Dow said Edward Jones generally recommends having no more than 5% cash in an investment portfolio. “You don’t want too little, but you don’t want too much either,” she said.

A “cash management plan” is an important part of financial and investment planning, said Rob Williams, managing director of financial planning, retirement income and asset management at the Schwab Center for Financial Research, a division of Charles Schwab & Co. SCHW.
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You can often hear financial experts describe money investing as a spectrum of options where there is a trade-off between return and liquidity.

With that said, here are the places to leave your extra cash:

Current and savings accounts

Some checking accounts earn more interest than regular checking accounts. But there are caveats, explains Ken Tumin, senior industry analyst at LendingTree and founder of DepositAccounts.com.

Many high-yielding checking accounts require a minimum number of transactions to trigger APY, typically between 8 and 20, he said. He added that high APYs often have cash limits, typically $10,000 to $25,000. So if you want to keep money above those limits, it won’t earn the same interest rate as a high-yielding savings account, he noted.

“In many cases, the advantage of high-yield checks over high-yield savings accounts may not be worth the effort,” he said. But the rate advantage between savings accounts at brick-and-mortar banks and online banks is noticeable, he said.

Tumin cited FDIC data that shows the average savings account rate nationwide was 0.33% through mid-January. Tumin said without the overhead of brick-and-mortar competitors, online banks are offering up to 4.20% APR on some savings accounts as they look for a competitive advantage.

Brokerage companies also offer “sweeper” services, in which uninvested money earns interest while it remains for the next trade.

For example, Robin Hood
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transfers uninvested funds of eligible customers to a deposit account in a network of banks with an annual interest rate of 4.15% at the beginning of February. Fidelity Investments automatically invests money in money market funds, which at the beginning of February brought a seven-day yield of 4.14%, the spokeswoman said.

At Interactive Brokers IBKR,
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unused cash balances over $10,000 may remain in the account and earn interest. The formula is based on the federal funds rate minus 50 basis points, said Steve Sanders, executive vice president of marketing and product development. At the moment, this rate is 4.08%.

money market funds

According to Williams, money market funds fall in the sweet spot. He noted that returns can be higher than savings accounts, although it usually takes a day to redeem your savings.

These mutual funds are made up of components such as short-term, high-quality federal and municipal debt, as well as high-quality corporate debt that matures quickly.

By the end of last year, money market funds had $5.2 trillion in assets under management, according to the Treasury Department’s Office of Financial Research. Data shows that by February 2020, this far exceeds the $4 trillion in funds under management.

According to Peter Crane, president of Crane Data, it will be a couple of weeks before the latest 25 basis point increase is fully reflected in the average return.

According to statistics from Crane Data, the last time the largest money market funds averaged seven-day returns in excess of 4% was in December 2007. “Their biggest weakness is now their biggest strength. They follow the Fed,” Crane told MarketWatch.

As the spread of returns across many savings accounts and money market funds widens, says Kyle Simmons, founder and lead financial advisor at Simmons Investment Management in the Denver area, consumers should pay more attention to these vehicles.

He added that ultra-short-term ETFs are another option. Like money market funds, they provide access to government and high-quality corporate debt with fast maturities.

But don’t confuse money market funds with money market accounts. They are completely different, Tumin said. He noted that a money market bank account is similar to a savings account.

CD and Treasury bills

Treasury bills and CDs lie on the other side of the money spectrum. They have maturities ranging from 4 to 52 weeks. The return can be higher than money market funds, but you have to wait longer to get your money back.

The market yield on one-month Treasury bills currently exceeds 4.6%, according to the Fed. The last time one-month trailing Treasury bill yields exceeded 4% was in October 2007, according to data from the Federal Reserve Bank of St. Louis.

Investors can buy various lengths of Treasury debt through their broker or TreasuryDirect.gov. (TreasuryDirect is also a place to buy popular I-bonds, but these cannot be bought on the secondary market.)

Treasury bill interest is subject to federal income tax but is exempt from state and local taxes, Grazer said. This could provide “an advantage over CDs, depending on the difference in interest rates and the individual’s tax situation,” he said.

He noted that the secondary market for Treasury bills is larger than for CDs, making it easier to exit early if you need money before maturity.

One tactic for longer-dated CDs and Treasury bills: buy them with the expectation that interest rates will drop while the money is tied up. (“In our view, we are not in that climate right now,” Williams said. At the Fed, Powell said rates should be “higher and longer.”)

Of course, money held in Treasury bills or CDs is temporarily sidelined, for better or worse. “If the market takes off like a rocket while you keep your money, well, you might feel a little behind. This is the price you pay for low risk,” Grazer added.

Any maneuvers with money on CDs or elsewhere should not overshadow the overall goal for this part of a person’s wallet and portfolio, Williams said. “Cash is ultimately for profitability and stability, it is the safest part of your financial life.”

Read also: Dear taxman! Can I deduct the early withdrawal penalty if I upgrade to a higher rate CD?

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