Remember the good ol’ days when Treasuries paid 0% or so and you had to give a bank your toaster to open an account, paying 0.01%?
Right now you can find a CD paying 5%–and it doesn’t require locking up your money until the sun goes super-nova either.
On February 17, the 12-month Treasury closed with a yield of 4.97%. And the 6-month bill paid an even higher 5.01%.
You can find a bond ETF with an SEC yield of 4.63%.
And even a money market fund paying 4.45%.
What’s the case for stashing some of your cash in something “safe”? And what’s the best choice when you’ve suddenly got so many vehicles offering to pay you 5% or so? In today’s post, I’ll sketch out the pluses and minuses of these alternatives.
The case for putting some money into an asset paying a very safe 5% is straightforward.
A safe 5% yield is very attractive right now considering that it looks like stocks are about to go into one of those periods of volatility. Bullish Wall Street analysts see the Standard & Poor’s 500 finishing 2023 at 4500 or 4600 or so. That’s roughly 10% higher from the Friday, February 17, close of 4079. But no one is predicting a straight shot from here to 4600. Stocks will have to navigate volatility as the Federal Reserve continues to fight inflation by raising interest rates and Wall Street struggles to price in a peak of–well who knows? And we’ve got a good chance at volatility caused by resurgent (or at least stubborn) inflation as prices promise to be stickier than expected. Higher oil prices. Supply chain glitches and actual shortages for some key commodities. Even a global credit market tumble if the U.S. debt ceiling crisis plays out in the wrong way.
With all that potential volatility a 10% gain doesn’t sound all that attractive.
Remember that a 10% gain is the bullish case. We could end the year flat from here or even lower if macro factors such as interest rates, inflation, oil prices, the dollar, and the debt crisis break in the wrong direction.
And, finally, even if you believe in the bullish forecast for the year, there’s a good argument to be made for putting some money into a safe 5% yield vehicle now until you see how the June-July period when the debt ceiling crisis, stubbornly high inflation, more interest rates increases than the market has now priced in, and a potential return of the Bear market as stocks seek a true bottom roil financial markets. (That Bear market bottom is my personal view, by the way.) Having some cash on the sidelines will act as a shock absorber in the case of unexpected market events and give you some dollars to put to work at lower stock prices if the opportunity presents itself.
For all these reasons, a safe (relatively) 5% yield looks pretty attractive right now.
But which vehicle to choose? They all have slightly different pluses and minuses.
Choice #1: An 11-month certificate of deposit (CD) paying 5%. I use this particular term because that’s the duration that Capital One Bank is offering on its 5% CD right now with a $0 minimum. You can get a 12-month CD with the same yield from a number of banks. Check BankRateMonitor.com or Nerdwallet.com for alternatives. The advantage here is very straightforward: This is an absolutely safe vehicle. Short of the end of the U.S. dollar (in which case the best investment is probably a gun and lots of ammo), you are guaranteed to get your capital back and to receive your interest payments. The disadvantages are a bit more subtle. First, unless you buy a CD that allows early redemption–such as those from Goldman Sach’s Marcus brand, your money is locked up for the time of the CD. Need it early and there’s often a penalty that will wipe out most of your gains from interest. Second, while your capital is safe from fluctuations in the financial markets, you also won’t see any gains from a downward move in interest rates. Such a move would result in capital gains if your money were in bonds since the price of existing bonds with higher yields would go up if interest rates fell. Not the case with a CD, however.
Choice #2: A Money Market Account. Advantages: You can find a yield nearly as high as on a CD. CFG Community Bank is paying 4.45% on a money market account with a $1,000 minimum deposit. You also aren’t locking up your money for a set period and you get the ability to write checks (or use electronic equivalents). Disadvantages: First, some money market accounts require relatively high minimum deposits– to get the 4.40% rate on a money market account from Western State Bank, for example, you’ll need a minimum deposit of $5,000. Second, as with a CD, while your capital is safe from fluctuations in the financial markets, you also won’t see any gains from a downward move in interest rates. Such a move would result in capital gains if your money were in bonds since the price of existing bonds with higher yields would go up if interest rates fell. Not the case with a money market account, however.
Choice #3. The direct purchase of a 6-month, 12-month, or 2-year Treasury through the government’s Treasury Direct program at TreasuryDirect.gov. I mention these maturities since they all, as of Friday, February 17, yielded near 5%. The yield on the 2-year Treasury was 4.62%. The yield on the 12-month Treasury was 4.97%. And the yield on the 6-month Treasury was 5.01%. It’s likely that with the Federal Reserve still looking to raise its short-term benchmark interest rate that the yield on short-term Treasuries will edge higher too. So you might want to create a short-term Treasuries ladder by buying some now and some around the Fed’s March 22 and May 2 meetings when the Fed’s moves and rhetoric might push short-term yields higher. Advantages: Interest payments are just about guaranteed–unless you think that the U.S. government will default on its debt in a global crisis triggered by a failure to raise the debt ceiling. If yields fall–as they might later in 2023 if the Fed decides that it has pushed rates as high as it can without threatening to trigger a recession–then bond prices will climb. So you might get a capital gain to go along with your interest payments. So maybe looking at some 12-month Treasuries makes sense here. If you hold to maturity, you are guaranteed to get your capital back. Disadvantages: You’ll need to set up an account at TreeasuryDirect to buy and sell these bonds. The process has been relatively painless in the past but some government Internet sites have been very glitchy in the aftermath of the Covid pandemic. If we get a full-fledged financial market crisis as a result of a failure to lift the debt ceiling in a timely fashion, the Treasury market could get very scary. You’ll have to remember (so that you don’t panic sell) that you get your capital back if you hold to maturity no matter what prices in the secondary market do.
Choice #4: Bond ETFs or funds. Advantages: The reason to consider a bond fund or ETF is the same as that for buying a Treasury–you can get a yield near 5% now and the possibility of capital gains if/when the Federal Reserve decides to cut interest rates. You can buy the ETF or fund through your existing brokerage account so you don’t need to go to the trouble (minimal though it might be) of setting up a TreasuryDirect account. Disadvantages: Since bond funds never mature (managers replace bonds that mature with other maturities), you aren’t guaranteed to get your capital back if the market trends against you. If interest rates continue to rise and the Fed doesn’t pause its rate increases later in 2023, the market price of your bond fund could fall. This is one reason that in this category I prefer relatively actively managed funds or ETFs that can move between bond classes to navigate changes in market trends. One to look at is the Pimco Enhanced Short Maturity Active ETF (MINT). Managers at that ETF have the ability to shift among Treasuries, corporate debt, and securitized debt. The expense ratio is 0.36% and the SEC yield, which is calculated by annualizing the yield over the last 30 days, was 4.63% on February 17.
I suspect that we’ll get a chance to buy a slightly higher yield sometime in the next few months. At the moment, for some of your cash, 5% looks very attractive.