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Cash is Back!

The decade-long era of zero, and even negative interest rate policies across the globe, has come to an end. Savers can get paid again. This is welcomed news after the decade-plus of ZIRP policies (zero interest rate policy). Zero-interest rate policy began after the Great Financial Crisis (2007 through early 2009) and only ended with the Federal Reserve’s (the Fed) rate hikes last year. For more than 12 years, the Fed Funds rate was below 3% and for most of that time near zero. Europe even toyed around with negative interest rates for a while. It was wild.

In the US, shorter-term Treasury yields have increased and savers are finally being rewarded with high-quality yield out of high-quality government bonds and money market funds. To understand why short-term high-quality bond yields are rising, look no further than the Fed Funds Rate. This rate is the Fed’s primary tool to adjust monetary policy. In the last 12 months, soaring inflation has caused the Fed to raise this rate by 4.5%, the highest level since 2007 and at the quickest pace of rate hikes since the 80s. Why does this matter? Because, short-term, high-quality interest rates in the open market tend to track the Fed Funds rate and have risen alongside it. Unfortunately, the same cannot be said for bank savings rates. Even as the Fed has increased the benchmark Fed Funds Rate, savings accounts and CDs at the large brick-and-mortar banks have failed to follow this trend and remain extremely low relative to market yields. According to Bankrate’s February 1, 2023 weekly survey of institutions, the national average yield for savings accounts is still only .23 percent APY. With inflation still elevated, the true cost of holding low-yielding cash has increased as inflation erodes purchasing power, resulting in a negative real return.

For savers and investors with large cash positions sitting in savings accounts, lower yielding money market accounts or CDs, the current environment is providing an opportunity to finally put your money to work for you. Consider the following opportunities we are seeing right now as I’m writing this article:

  • Money Market funds with yields over 4.5%

  • A 6-month Treasury bill rate is at 4.91% (a year ago this rate was 0.64%)

  • A 1-year Treasury bill rate is at 5.03% (a year ago this rate was sub 1.0%)

Keep in mind that Treasury securities are backed by the full faith and credit of the US Government. Because the market considers there to be virtually no chance of the US government defaulting on its obligations, these bills are considered to be “risk-free.” Interest earned from Treasury bills is not subject to state and local income taxes making these yields even more attractive.

Bottom Line: Investors should strongly consider moving excess savings out of low yielding savings accounts and CDs, and into other options. Please give us a call if you would like to discuss your situation in more detail.



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