The financial press is beginning to notice the yields on cash and money markets, which have moved above 1.5% and towards 2% on average, as we've reported in recent days and weeks. (See some of our latest "Link of the Day entries.) The latest to comment include the website WealthManagement.com, which published an article entitled, "Cash Is (Once Again) King," and Morningstar, which features, "What Rising Rates Mean for Retirees." The former says, "Money-market funds, often used as a cash equivalent in some investors' portfolios, fell out of favor after the 2008-09 financial crisis, with yields dropping to 0.1 percent in many cases. But the Federal Reserve's interest-rate hikes, which began in December 2015, have changed the equation for the better. The Crane 100 Money Fund Index, which measures the average yield of the 100 largest taxable funds, registered 1.47 percent as of March 31. And the Crane Money Fund Average, the average yield of all taxable funds, totaled 1.27 percent."
The article tells us, "Prior to the financial crisis, in 2007, many money-market funds yielded 5 percent or more. But the crash of the banking industry led the Fed to push short-term interest rates to almost zero. Now things are different. The Fed has raised rates six times over the last two-plus years, most recently in March, leaving the federal funds rate target at 1.5 to 1.75 percent. And Fed officials indicate another two to three rate increases are likely this year."
The Wealth Management piece continues, "Money-market funds, often used as a cash equivalent in some investors' portfolios, fell out of favor after the 2008-09 financial crisis, with yields dropping to 0.1 percent in many cases. But the Federal Reserve's interest-rate hikes, which began in December 2015, have changed the equation for the better."
It states, "As long as the Fed keeps pushing rates higher, money-market yields should rise. By the end of the year, money-market fund yields could push 2 percent, says Peter Crane, president of Crane Data. The slew of Treasury-bill issuance also is boosting money-market yields, he says. The Treasury sold $330 billion of T-bills in the two weeks ended April 6 alone."
They quote Crane, "Certainly, cash is looking better than it has in a long time." The piece adds, "And he's not the only one who feels that way. Money-market fund assets climbed about 1 percent in 2017, the first advance in seven years. They now total $2.97 trillion."
The article also says, "To be sure, not everyone is gung ho on money-market funds. 'It's so important for people to understand that even though money-market funds are historically safe and new regulations should make them even safer, there is still some risk,' says Christine Benz, director of personal finance for Morningstar. 'They don't have iron-clad guarantees from FDIC insurance' like savings accounts do."
It adds, "Individuals investing directly with discount brokerages can use money-market funds as their core account, allowing them to write checks and buy securities directly with the account. The funds can yield more than 1.3 percent. But advisers are generally stuck with sweep accounts for their clients, and these can yield less than 0.2 percent."
Finally, they write, "On the exchange traded fund, there are no pure money-market ETFs now. Rather, there are several ultra-short bond ETFs, such as PIMCO Enhanced Short Maturity Active ETF (MINT). The share prices of these funds will generally dip when interest rates rise, so they aren't a cash substitute. The Securities and Exchange Commission is likely to allow pure money-market ETFs soon, Crane says."
In related news, Morningstar writes "What Rising Rates Mean for Retirees". The piece quotes the above-mentioned Christine Benz, "Investors have seen a little bit of volatility in their long-term assets ... but if you are a cash investor, if you are a retired person and you are holding some assets aside in true cash investments because you want to hold them to meet your ongoing living expenses, cash yields are a lot more attractive than they were a year or two ago. My advice is that people should get serious about wringing as much as they possibly can out of their cash accounts, shop around, revisit this if they haven't for a while."
She continues, "A couple of years ago, it was hard to get excited about making 0.5% versus 0.2%. Now, you don't have to look too hard to find online savings account, FDIC-insured investments that are paying 1.75% or more. So, shop around. Be careful if you have brokerage sweep accounts. Those have notoriously low yields attached to them. Keep the bare minimum in your brokerage accounts, try to get that money out and invested in the highest-yielding option that you can find."
Benz comments, "Money market mutual funds are not FDIC-insured, so that stirs up a lot of confusion. Banks offer what are called money market accounts that are FDIC-insured. If you are looking to a mutual fund, there might be a convenience factor to have those assets side-by-side with your other long-term mutual fund assets. Just bear in mind that you do not have a guarantee associated with those investments. But there are relatively new restrictions that have gone into effect for money market mutual funds. They are safer than they were in the past. They need to have more liquidity in their portfolios. They need to focus on higher credit quality."
When asked about bonds, she responds, "If we look at the core intermediate-term bond products that a lot of investors hold in their portfolios, year to date, they are looking at losses of 2%, 3% in some cases, which certainly is more loss than most investors want in their bond funds. But we have seen a gradation among bond funds. Certainly, the short-term and the ultrashort-term investments have held up quite well, whereas the long-term funds, especially, the long-term government funds, have really borne the brunt of some of the interest-rate-related volatility that we've seen so far this year."
Finally, Benz adds, "If you are a bond investor and you have a time horizon of, say, five years or longer, I think it's safe to say that you will earn a higher return over that time horizon than you are likely to earn in your cash investments, but you will have more principal-related volatility. If that makes you uncomfortable, well, then you can stick with cash and short-term bond funds. Just know that you probably will lag an intermediate-term portfolio over a longer time horizon."
