Got cash? Here is what to do with it now
, CHICAGO – Cash is no longer trash.
While there is no return to the 5 percent money market yields savers got a decade ago, there is some relief.
If you work at it, you can find money market funds yielding 1.5 percent and two-year certificates of deposit (CDs) or U.S. Treasury bonds yielding more than 2 percent.
As investors worried about inflation and rate increases by the Federal Reserve and central banks around the world, the Dow Jones Industrial Average and Standard & Poor’s 500 entered a correction of more than 10 percent last week.
The same forces that are cruel to stock and bond investors are good for people securing cash for upcoming college tuition, down payments for homes, retirement needs or emergency savings.
In fact, a person can park money for a mere six months in the safest of investments and earn even more than they would have from a 10-year commitment just a couple of years ago.
If you are looking for a place to park money, here is what to expect from short-term investments.
MONEY MARKET FUNDS
After earning only 0.03 percent in early 2011, some money market funds, such as the Vanguard Prime Money Market Fund, are now yielding close to 1.5 percent.
The average for the largest 100 money funds is 1.17 percent, said Peter Crane, president of money fund research firm Crane Data.
Money fund yields should rise about 0.25 percent with each coming Federal Reserve rate hike, Crane said.
Yields could even drift to about 3 percent by the end of 2019 if the Fed raises rates twice this year and three times next year, as is widely expected. A more aggressive Fed could nudge money market yields even higher.
Do not confuse money market mutual funds with money market accounts at banks. Bank accounts typically are insured up to $250,000 per depositor by the Federal Deposit Insurance Corp, which makes them safer. But the yields offered at many banks are still dismal, notes Michael Moebs, chief executive of Moebs Services, a bank consulting firm.
According to Bankrate, the average money market account at a bank is yielding just 0.14 percent.
Banks raise interest rates when they need to bring in cash to provide more loans. They have not felt the urgency, although Moebs is expecting that to change as small businesses benefit from tax cuts and demand more loans.
Savings accounts still pay near zero, but some banks and credit unions offer better interest on checking accounts.
If you have a brokerage sweep account where your money is deposited after you sell a stock, fund or other investment, it is probably earning near zero, too. That is fine if you want your money handy to deploy in stocks or bonds soon but not as a long-term investment.
CDS AND TREASURY BONDS
It is now possible to find a five-year CD yielding 3 percent and a one-year CD yielding 2.07 percent, according to Bankrate.com.
Scott Bishop, partner in STA Wealth Management in Houston, Texas, says the “sweet spot” is in short-term maturities (six months to two years). That is because an investor can get paid decent interest temporarily while evaluating longer-term stock or bond opportunities.
Bishop notes that two-year Treasuries recently yielded 2.09 percent, one-year notes yielded 1.93 percent while six-month paper yielded 1.8 percent.
If you have a windfall from selling a business or receiving pension lump sum, you should consider parking some of that money in money market funds and the short-term bonds temporarily before a major move into stocks and bonds, Bishop says.
Bishop is leery of bond funds because funds can suffer losses amid rising interest rates.
Indeed, the average U.S. core bond fund reacted to rising interest rates by losing 0.46 percent last week; the average global bond fund dropped 1.13 percent, according to Lipper, a unit of Thomson Reuters.
The silver lining as the markets try investors’ nerves? “Short-term rates are up,” Bishop says.
Editing by Cynthia Osterman