Get More For Your Cash!
It’s a bad time to hold too much cash in your portfolio or bank account. The Federal Reserve is systematically raising interest rates to temper inflation and as a result many fixed income products are becoming more attractive. Cash that is not needed for your emergency fund and that is left in a savings account loses value from inflation and earns minimal returns. The average interest rate for a savings account is low, and currently sits at 0.13% according to Bankrate’s 9/21/2022 weekly institutional survey.
The Fed raised interest rates another 75 basis points on Wednesday, 9/21/2022, increasing the current Fed Funds target rate to 3.25%. Further rate hikes are expected while inflation remains high and unemployment is low. Interestingly, the 2-year US Treasury note recently surpassed the 10-year Treasury in yield. Short term fixed income securities such as money market funds, US Treasuries, and other fixed or floating rate funds offer increasingly attractive yields with minimal risk. Here are some recent yields:
Schwab Money Market Funds (7-Day Yield as of 9/21/2022)
Schwab Value Advantage Investor SWVXX – 2.28%
Schwab Value Advantage Ultra SNAXX – 2.43% ($1,000,000 minimum initial investment)
Schwab Treasury Obligations Investor SNOXX – 2.08%
Schwab Treasury Obligations Ultra SCOXX – 2.23% ($1,000,000 minimum initial investment)
US Treasuries (Par Yield CMT Rates as of 9/21/2022)
13 Week Bill – 3.31%
26-Week Bill – 3.86%
52-Week Bill – 4.08%
2-Year Note – 4.02%
Treasury I bonds are another vehicle that provide an attractive yield and hedges against inflation. I bond interest is a combination of a fixed rate and the inflation rate. The I bond inflation rate is calculated semiannually (November 1st and May 1st) based on CPI-U, and the new rate is applied to your bonds every six months. An I bond bought in October 2022 would yield the current annual rate of 9.62% until April 1st. Afterwards, the new rate calculated in November would be applied.
I bonds must be held for a minimum of 12 months, and if they are redeemed in less than 5 years, they will forfeit the previous 3 months of accrued interest. A maximum of $10,000/year per person can be purchased in I bonds via the Treasury Direct website. Therefore, a married couple could buy a total of $20,000 in 2022 ($10,000 per account) and another $20,000 in January 2023. Another $5,000 per person can be purchased using your federal income tax refund using Form 8888. Additionally, parents can purchase I bonds for children under 18 using custodial accounts.
More information on I bonds can be found on the Treasury Direct website here: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm
US Treasury I Bonds
I Bonds – 9.62% (through October 2022; maximum of $10,000/year per person)
Caution: Higher interest rates increase the cost of variable rate debt! Debt such as margin loans, home equity lines of credit (HELOC), variable loans and credit card debt are becoming more expensive. These debt vehicles should be used sparingly and paid down quickly to avoid higher interest charges.