Yields will cool in 2024. Here’s how much you should stash in cash
It may be hard to imagine today, but the end is nigh for hot yields on idle cash. The Federal Reserve’s rate-hiking campaign, which started in March 2022, has lifted yields on an array of plain vanilla investments. The 3-month Treasury bill , for instance, sits at about 5.4%, while the Crane 100 Money Fund Index of money market funds sports an annualized 7-day current yield of 5.19%. Fed funds futures pricing suggests a chance that the central bank will begin trimming rates as soon as next spring, which means the interest income that investors have been earning on cash may begin to cool in as little as six months. The prospect of lower rates has led financial advisors to talk to clients about locking in some of those rich yields — and keeping reinvestment risk at bay — by adding longer-dated fixed income issues to their portfolios. “They’re really enjoying having this yield on savings,” said Donald Roy, a certified financial planner and founder of New England Wealth Advisors in Bedford, New Hampshire. He said that about half his clients have been open to the idea of moving out of cash and locking in some duration — that is, adding longer-dated bonds that carry added price sensitivity to rates. “Once things slow down, [the Fed] will lower rates,” he added. “We don’t expect them to go down to virtually zero, but they just won’t be as high.” The question facing investors now is how much cash should they hold as they begin redeploying their savings into longer-dated assets. Establishing an emergency reserve The rule of thumb is to set aside enough cash to cover three to six months of living expenses, but you can still earn a decent yield on those sums right now. “This ultrashort emergency fund can be kept in pure cash, including money market funds and savings accounts,” said Jerrod Pearce, CFP and partner at Creative Planning in Overland Park, Kansas. Short-term Treasury bills can also work here. Bread Financial offers an annual percentage yield of 5.15% on its high-yield savings account, while Synchrony pays a 4.75% APY. The downside to high-yielding savings accounts is that banks can trim yields as rates come down, something certificate of deposit holders don’t have to worry about, as they can lock in their rates. However, you have easy access to liquidity, which isn’t necessarily the case with CDs. “Breaking” a CD before it matures results in losing some of your interest. Investors may also want to adopt a similar approach if they have lump sum, nonrecurring expenses coming in the next 12 months: Sock away any money you need for a big project, such as a home renovation, in money market funds or a high-yield savings account. “If you need it in a year, we use some institutional money markets that are yielding 5.4% right now,” said Roy. “That’s a one-day trade and very liquid.” Longer-dated priorities Money that’s earmarked for a timeline beyond that 12-month span could be redeployed into fixed income assets that allow you to lock in longer-term yields. Pearce uses bond ladders with maturities in a 5- to 7-year time span for clients who want to keep some assets relatively safe while still generating income. A bond ladder involves building a portfolio with staggered maturities, which allows investors to reinvest the proceeds of maturing bonds into later-dated issues. In a falling rate environment, you may be reinvesting at a lower rate, but you have locked in the higher yields on longer-dated bonds you’ve already purchased. Roy, who has been building out laddered bond portfolios in a 2- to 8-year time span, has been using municipal bonds for tax-sensitive clients. Municipals offer interest income that’s free of federal taxes, and muni investors may also avoid state levies if they live in the state where the bond was issued. Investment grade bonds and Treasurys have both been solid candidates for ladders, Roy said. “Investment grade corporates offer lots of opportunity at this point,” he noted. “Clients like the idea of a fixed maturity: They know when the money is coming back to them.” Bond funds and ETFs with a duration of four to six years have also been an option for clients who want to generate more yield with money that’s earmarked for the longer term, Pearce said. He likes Vanguard Total Bond Market ETF (BND) , which has a 30-day SEC yield of 4.64%, and Vanguard Intermediate-Term Corporate Bond ETF (VCIT) , with a 30-day yield of 5.57%. Be sure to keep an eye on quality. “We want bonds to be reliable so that when we get the next bear market, they do what they are supposed to do,” Pearce said. “It’s that safety net for the next five to seven years.”
Aniket Pujari
6,160 PostsAniket Pujari is a passionate finance and technology enthusiast with a strong academic background in Financial Markets. Since 2015, he has been deeply immersed in the world of cryptocurrencies, blockchain technology, and global financial systems, building a wealth of knowledge and expertise in these rapidly evolving fields.
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