Since Interest Rates Are Finally Higher, Where Can You Consider Parking Your Cash?

Having funds liquid and readily available can be a top priority, especially in times of economic uncertainty. I have been asked by friends, family members, and clients “where are wise places to park your cash to earn some interest?”

A couple years ago, interest rates on high yield savings accounts, certificate of deposits (CDs), and Treasury Bills, were all well below 1.00%. However, that is not the case anymore—Thank you, inflation!...The Federal Reserve, led by Jerome Powell, has been aggressively raising interest rates since early 2022, and at the fastest pace for rate increases in several decades.?

In January 2022, the fed funds rate was 0-0.25%. As of February 15th, 2023, the fed funds rate, which is the rate that banks lend to one another and is often used as a benchmark interest rate for consumer credit, is at 4.50-4.75%. While the inflation rate is still north of 6% as of February 2023, the fed is finally using the word “disinflationary” for explaining where inflation is at relative to where it was at in June 2022, which was at 9.1%.

The silver lining to this high inflation we are currently experiencing is that interest rates on certain fixed income investments are now providing a pretty good yield, so it can finally make sense to invest your cash into these fixed income investments. Ever since the financial crises, interest rates and inflation have stayed low, so one reason to be invested in fixed income during the past 10-15 years was to mitigate the volatility of the stock market. Everyone’s situation is unique, but for the most part, having more equity exposure during that 10+ year time frame was advantageous. However, certain fixed income instruments within a portfolio are now providing income AND can help mitigate volatility of the stock market.

In this article, I am going to outline two different options investors can choose from for fixed income vehicles to help them earn a rate of return better than just leaving cash in your traditional checking or savings account. Primarily, I will compare different fixed income assets that get a lot of comparison, CDs and Treasury Bills. Even though, at this time, both are not earning an interest rate above the current inflation rate of 6.4%, they are providing a yield much higher than cash sitting in a traditional checking or savings account at a commercial bank (i.e. 0.1%).

1) Certificate of Deposits (also known as CDs) are a type of FDIC-insured bank account that offers a fixed interest rate, also called an annual percentage yield (APY), for investing your cash with limited access to touching the funds. The terms for CDs can typically range from 3 months to 5 years. If for some reason you need the cash sooner than the term you agreed to, you will have to pay a penalty for liquidating the CD. The interest rate on CDs are taxable, and the income received is taxed at the federal and state income tax levels. As of this writing (2/15/2023), CDs are yielding anywhere from 4.50-4.90%.

2) Treasury bills (also known as T-bills) are short-term bonds issued by the U.S. government. They are considered among the safest investments since they are backed by the full faith and credit of the United States Government. They are often referred to as a “risk-free” investment given the government backing. There are three different types of Treasuries: Treasury bills are issued for terms of one year or less, Treasury notes are issued for terms of 2-10 years, and Treasury bonds are typically 20-30 years. The biggest difference between T-bills and CDs, besides the instrument being issued by the government instead of a bank, is that the secondary market for T-bills is one of the most-liquid financial markets. This means that it is much easier to exit from a T-bill than from a CD, and there are no penalties for selling out of a Treasury. Income from Treasury bills are taxed just on the federal level, not state and local income, so they are considered partially tax exempt. As of this writing (2/15/2023), Treasury Bills are yielding anywhere from 4.70-5.0%

Given interest rates for both CDs and Treasuries have been moving higher since early 2022, a hedging approach can be to do a laddered bond strategy. As an example, by laddering short-term Treasuries, you can purchase different maturity dates such as a 3-month, 6-month, 9-month, and 12-month treasury bills. Once the 3-month T-bill matures, you would then reinvest into another 1-year treasury bill.

Each person has a unique approach based on their own age and time horizon, and a few other fixed income options that were not discussed are high yield bank accounts and money market funds. However, broadly speaking, if you have cash laying around outside of a rainy-day fund and are wondering how you can invest those funds conservatively, CDs and T-bills are viable options. If you have any questions about any of the above, please reach out to me or my team at The Clark Group.

Sources:

1)?????https://fred.stlouisfed.org/series/FEDFUNDS#

2)?????https://research.stlouisfed.org/publications/economic-synopses/2022/12/16/where-do-you-keep-your-liquid-wealthbank-deposits-or-t-bills#:~:text=T%2Dbills%20are%20short%2Dterm,bill%20than%20from%20a%20CD.

Disclosure: The information contained within this article is for informational purposes only and not intended as advice. Past performance is not a guarantee of future results. For our full disclosure, please visit: https://clarkgroupam.com/disclosure