February 10, 2020: Update On Short Term Cash, Treasury Bills and Brokered CDs

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Update On Short Term Cash, Treasury Bills and Brokered CDs

As always, we believe that short term cash investments are very important. We have regularly updated and discussed this. The following are the list of newsletters on this topic (as a reminder, you can always find the newsletters on our Newsletter Collection page:

T-Bills vs. Brokered CDs

We want to remind our readers that if there is no any other consideration, there is really no point to keep a large cash in a major bank checking or savings account. These banks are still offering extremely low interests. For example, our latest check on Bank of America interest rates reveals that its latest APYs are between 0.03% to 0.06%. Basically, you might as well assume it’s nothing.

Here are the latest interest rates for T-Bills (Treasury Bills) and brokered CDs based on Fidelity:

A few comments:

Brokered CDs (i.e. those you can purchase from a brokerage, in this case, from Fidelity) now offer higher yields than T-Bills with the same maturity. This is different as early as a year ago (see November 12, 2018: The Staggering Low Interest Rates From Big Banks , for example, when CDs had lower rates than T-Bills’).
If one checks the CD rates offered by major banks (see the above BOA CD rates), you can see brokered CDs are way better. For example, even the best Promotional BOA 13-month CD only offers 1.55% APY, compared with 1.65% 12-Month brokered CDs you can buy in Fidelity.
We generally believe that there is no point to only go for CDs beyond 2-3 years. For example, one can invest part of the capital to our total return bond portfolios listed on Brokerage Investors page and the rest of them to a safe brokered CD or a CD ladder (i.e. multiple maturities) to enhance returns.

Brokerage money market funds

As virtually all major brokerages are now offering commission free stock and ETF trades, investors should now focus on their attention to the returns of cash in their brokerage accounts. In general, one should put their cash to either a government (Treasury) money market fund (very safe) or a prime money market fund. Let’s take a look at how big brokerages are compared:

Money Market Fund	7-Day SEC Yield
Vanguard Federal Money Mkt	1.51%
Fidelity Government Money Mkt	1.23%
Schwab Government Money Mkt	1.3%
Etrade Sweep Rates	0.25% APY ($1m) to 0.01% (<=$250k)
Vanguard Prime Money Mkt	1.63%
Fidelity Money Mkt	1.44%
Schwab Prime Money Mkt	1.49% (or 1.63% with $1m minimum)

Vanguard is still maintaining the highest federal and prime money market rates. Schwab has been very aggressive, especially for their prime money market fund. We didn’t list TD Ameritrade in the above table as it’s in the process of being acquired by Schwab.

From the above, one can see that these brokerage money market funds are very competitive, compared with 3-month T-Bill’s. As we discussed in February 4, 2019: Cash And Money Market Funds: Interests And Safety , we view Federal or Government money market funds are as safe as a bank deposit. Again, unless you have other restriction or very short term need for your cash, there is no reason why you don’t want to put your cash to one of the much higher yield Federal or Treasury money market funds in a major brokerage.

Market overview

Companies continued to post better than expected earnings report for last quarter. Based on Factset, for Q4 2019, the blended earnings growth rate for the S&P 500 is 0.7% after 64% of the companies in the index reported earnings on last Friday. This is much better than -1.7% expected on December 31, 2019. Investors also somewhat believe that the coronavirus outbreak in China is very much contained: stocks are again at all time highs. We again have no strong conviction on the short term market movement and will respond as it goes.

Regardless, this is an overly extended and very overvalued market. We thus call for staying the course and adopting a more tactical strategy.

For more detailed asset trend scores, please refer to 360° Market Overview.

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future.

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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