Before You Invest Your Cash…

iStock by Getty images

Before You Invest Your Cash….

Is it a good time to invest your cash ? Yes. As the Fed has steadily increased the overnight lending rate, short-term interest rates have steadily risen.

Investing cash requires some investment knowledge. For example what is a Certificate of Deposit (CD)? What is a Treasury Bill? What is A High Yield Saving Account? What is a Money Market Fund?

The most important question though is “How do I know the real interest rate I will be paid?”

I’m going to start with the last question first because knowing the interest rate you will earn can be tricky and confusing.

The chart below comes from the US Treasury.

It is published daily and shows the annualized interest rate for different maturities of Treasury Bills, Notes and Bonds [1].

On May 23rd a T-Bill  with one month to maturity is paying 5.67% on an annualized basis.

This means if I invest for one month I will receive 1/12^th of 5.67%. It is a little less than half a percent. I will NOT receive 5.67% for one month. Tricky.

It isn’t meant to be tricky or deceiving. Knowing what an Annualized Percentage Yield (APY) is something everyone should be aware of before they invest cash.

Resource Center | U.S. Department of the Treasury

Date	1 Mo	2 Mo	3 Mo	4 Mo	6 Mo	1 Yr.	2 Yr.	3 Yr.	5 Yr.	7 Yr.	10 Yr.	20 Yr.	30 Yr.
05/23/2023	5.67	5.26	5.34	5.42	5.39	5.06	4.26	3.99	3.76	3.73	3.7	4.08	3.96
05/01/2023	4.49	5.17	5.27	5.22	5.14	4.86	4.14	3.85	3.64	3.62	3.59	3.95	3.84

Moving across the chart you will notice that the longer maturities, out to 30 years are paying less than the shorter maturities.

When shorter maturities pay more than longer maturities it is called “an inverted yield curve” and is not “normal”.

Normally shorter maturities would pay less than longer maturities.

One reason shorter maturities are paying more is due to the Fed raising the overnight lending rate in order to slow the economy and bring inflation down.

At some point the Fed will begin to lower rates. That is why it is a good time to invest cash and take advantage of higher rates while they last.

There are different options to consider. 

Certificate of Deposits (CDs)

Certificates of Deposits can be issued by a bank or through a broker. They are like a savings account. CDs can have either a fixed interest rate or an adjustable rate for a specific period of time.

When you look for a CD, you will see in the description the “APY”.  Always remember that this is an annualized rate. 

Unlike Treasury Securities that can be bought and sold daily, CDs have restrictions and fees associated with early withdrawals.

If you are considering a  CD, make sure the bank is FDIC insured. 

Certificates of Deposit (CDs) | Investor.gov

High Yield Savings Accounts

Many financial institutions offer what is called a “High Yield Savings Account”. If you have a regular savings account that doesn’t earn much interest, a high yield savings account might be a better option. Higher Yield is a bit of a misnomer though. It doesn’t mean that you will receive the same interest rate as a T-Bill or CD because you have the option to withdraw your savings at any time.

Unlike T-Bills and CDs that have fixed investment periods, High Yield Savings Accounts do not.

Always ask about minimum deposit requirements and fees. Make sure the High Yield Savings Account is with an FDIC insured institution.

Money Market Funds

Money Market Funds are mutual funds. They invest in a pool of short-term securities. If you invest in a Money Market Fund you own shares of the fund, not individual securities.

The interest rate you receive is not fixed. It can fluctuate daily based on the securities in the fund. There are expense ratios (fees). Money Market Funds are not covered by the FDIC but may be covered by SIPC if your account is held at a brokerage firm.

Most Money Market Funds have daily liquidity, You are not locked into a specific time period. The minimum required amount to buy a Money Market Fund can be higher than a T-Bill or CD.

What are the risks?

There are always risks. 

When you are investing cash the expectation is that you are going to receive the amount you invested plus interest at a specified date in the future.

One risk is that  interest rates will continue to go up. Interest rates going up is riskier for longer maturity investments. When rates go up the value of longer-dated bonds goes down.

If you are invested in a 3-month or 6-month security and rates go up, you may benefit from reinvesting at a higher rate.

A second risk is called credit risk. If you are buying a CD from a bank, do you know the credit rating of the bank? Not all banks have the same credit ratings and lower credit ratings imply more “risk”.

Today we are facing the possibility of a credit risk in the Treasury market. If the debt ceiling is NOT raised, US Treasuries might be downgraded. That means that interest rates will go up as bond prices go down.

You might not receive interest payments on bonds that you currently own.

I believe that this is a very small risk. We will know in a few days what the outcome is.

I believe a third risk has entered the market. The risk is that a bank experiences a “social media”  run on the bank. We have seen it happen recently.

If a bank that issues CDs fails, will you get your money back? Yes if the bank is FDIC insured and you do not have more than $250,000.00 in any one eligible account.

Make sure you understand how FDIC insurance works and how SIPC insurance works.

[1] Treasury Bills or T-Bills have a maximum maturity of 1 year. T-Bills are a “cash equivalent”.

If you want to invest for a longer time period Treasury Notes have a maximum maturity of 10 years.

Treasury Bonds have a maximum maturity of 30 years.

This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.