Where is your cash?
By YBB Personal Finance
With the Fed in higher-rates-for-longer mode, many investors are also staying in “cash” for longer.
“Cash” includes anything with less than 1-yr maturity that can be liquidated without concerns about large losses – short-term CDs (at banks or brokerages), online savings accounts (FDIC insured), T-Bills, money-market accounts (at banks; FDIC insured), money-market funds (at fund firms; not insured). In this higher rate environment, “cash” can be part of the fixed-income allocation.
Bank CDs have early withdrawal penalties, typically, 3-6-month interest. Don’t assume that on maturity, the bank will move funds into a new CD with good rates – you must do this yourself. Brokerage CDs fluctuate daily in value but will pay in full upon maturity. However, they may be illiquid & selling them prematurely may cause decent haircuts (sold at “bid”, bought at “ask”, with difference being the “spread”).
Be sure to verify the FDIC insurance for banks (or, the NCUA insurance for credit unions) – many fintech apps that offer attractive rates may have misleading ads about the FDIC insurance; some foreign banks operating in the US may not be covered by the FDIC. Misrepresenting the FDIC is illegal, but the FDIC has limited resources to chase bad actors. There are now limits on how many POD/ TOD accounts one can have at the same bank & still be covered by the FDIC insurance.
T-Bills can be bought at Treasury Direct, & more conveniently, also at major brokerages without commissions; several brokerages offer auto-rolls (Fidelity, Schwab, etc). They can be bought at Auctions (weekly for most; monthly for 52-week) or in the secondary market (with small bid-ask spreads). For auctions, the orders can be entered from the afternoon of the auction announcement day to the early-morning of the auction day (including weekends & holidays); orders cannot be entered before the related Treasury announcement. Brokers may require funds within 1-2 days of auction except when there is a maturing T-Bill on the next settlement day.
There are differences between the money market accounts at banks (with FDIC insurance) and the money-market funds at brokerages or fund firms (no FDIC insurance). Several brokerages have money-market funds also as core/settlement funds (Fidelity SPAXX, Vanguard VMFXX, etc), but others (Schwab, etc) require moving money around with T+1 settlements. Money-market funds, like other mutual funds, aren’t insured but (i) they are regulated by the SEC, (ii) their portfolio management, administration/ recordkeeping, & securities-custody must be at different subsidiaries or companies, so it won’t be easy to pull a fraud, (iii) brokerage SIPC insurance & any excess coverage may apply (CDs & money-market funds held at brokerages are treated just as other securities in the account).
In workplace retirement accounts (401k/ 403b/ 457), money-market funds or stable-value (SV) funds may be available; instead of mutual funds, some plans may offer CITs (commingled/ collective investment trusts) that are regulated by the OCC (not the SEC).
Beyond these are the ultra-short-term bond funds (ICSH, USFR, JPST, etc) & short-term bond funds (BSV, SHY, VGSH, etc). These may have noticeable fluctuations in values but would also have gains when the interest rates fall. So, it’s important to watch the Fed for action & guidance – the FOMC meetings are almost every 6 weeks.
A future article will cover account safety. For more information,
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