Cash Management for the Short Term

With the recent Federal Reserve interest rate increases, cash is actually earning a larger return for the first time in years. While that modest return is unlikely to outpace inflation and earn a real return, it will produce some income as you wait to deploy your cash. Rather than hiding your money under couch cushions or at a brick-and-mortar bank earning next to nothing, we believe the cash management tools outlined below are viable short-term options for many investors to consider.

Money market mutual funds

The first type of security we’ll discuss is the money market mutual fund. As the name implies, these are mutual funds that issue shares to investors, just like any other mutual fund. The difference, though, is that the fund manager generally keeps the net asset value (NAV) at $1 per share and then makes regular payments to investors, with little or no capital appreciation.

Money market mutual funds are typically made up of high-quality short-term debt instruments like commercial paper, certificates of deposit (CDs) and treasury bills. There are a few different types, including government (U.S. treasuries), prime (floating rate debt and commercial paper) and municipal (municipal securities), and they may be either taxable or tax-free, depending on the types of investments they hold.¹ When comparing funds, the seven-day yield is often used to measure the annualized yield and is calculated based on the fund’s average seven-day distribution.²

Some Advantages

• Highly liquid – Security may be sold and cash is available for withdrawal or reinvestment on the next business day.
• Low volatility – Designed to trade near a NAV of $1 per share and not deviate from that. 
• Income potential – Money market mutual funds are nimble and returns generally track with market interest rates. Given the recent monetary policy of the Federal Reserve, we expect these funds to perform better than in recent, low-interest rate years.³

Some Disadvantages

• Credit risk – There is a risk that you could lose money, and there is no guarantee that you will receive $1 per share when you redeem the shares.⁴
• Inflation risk – As cash holdings, money market mutual fund returns tend to lag the latest inflation readings and thus have a negative real return.⁵
  
• Not FDIC insured –Money market mutual funds are investments, meaning they may lose value, and are thus not covered under FDIC insurance.
• Fees – Fees are typically minimal and are similar to other passive mutual funds, but this is something to keep in mind.⁶

Certificates of deposit

CDs are savings vehicles that hold a fixed amount of money for a fixed period, often six or 12 months. The quoted CD rate is the guaranteed rate you will receive. CD rates are influenced by the federal funds rate, which the Federal Reserve reevaluates during each of their regularly scheduled meetings throughout the year. Rates are determined by the issuing institution, so they can vary widely from one CD to another. We believe it’s wise to shop around before purchasing a CD, as financial institutions offer different rates and terms. If you hold your CD for the entire term, you will receive your original investment plus the interest you have earned.

Some Advantages

• Insured deposits – CDs are FDIC insured up to $250,000 per person, per bank.
• High yields – Yields are often higher than money market mutual funds and high-yield savings accounts, because your money in the CD is illiquid and cannot be withdrawn without penalty.
• Low risk – There is little risk that your CD’s return will fluctuate, as the rate is fixed and guaranteed.⁷

Some Disadvantages

• Penalties – Withdrawing your money before the term of the CD is complete comes with penalty fees, which vary depending on the financial institution issuing the CD.
• Illiquid – CDs are issued by time period and the money may not be withdrawn (penalty-free) before the term is over. On the other hand, this may also be considered an advantage, as you are incentivized to keep your money in the CD and not withdraw early.
• Reinvestment risk – If interest rates rise during your CD’s term, you won’t be able to capture the increased rate on the money invested without penalty fees since you are locked into your existing CD.

High-yield savings accounts

The national average deposit rate on a traditional savings account, as of April 17, 2023, is just 0.39%,⁸ with many traditional brick-and-mortar banks paying only a couple of basis points (100 basis points equals 1%). Depositors often open a savings account at the same bank as their checking account, allowing for easy transfers between accounts. With the recent addition of internet banks, that dynamic has shifted. High-yield savings accounts offered through online banks typically offer higher rates than a traditional savings account.⁹ Many of these banks today offer annual percentage yields above 4%.¹⁰ These rates are variable as they are influenced by the Federal Reserve’s benchmark interest rate, and may move either up or down on a given day. Online banks can generally offer higher yields because of their lower overhead costs (no physical bank branch to run). Although the Regulation D rule limiting withdrawals from savings accounts to no more than six times per month has been lifted, many banks still impose this limit.

Some Advantages

• Insurance – High-yield savings accounts are protected under FDIC insurance, meaning up to $250,000 per depositor is insured if the bank fails.
• Liquidity – Electronic transfers between your high-yield savings account and your other accounts are typically easy, even if the accounts are at different banks.
• No Investment Risk – Your high-yield savings account is purely cash, with no securities involved.

Some Disadvantages

• Limited features – Online banks and high-yield savings accounts can be bare-bone operations, which allows them to offer such high yields. Because of that, these banks may not offer many of the features you’re accustomed to, such as ATMs, at a traditional bank.
• Shorter history – Many online banks are relatively new to banking and new to offering this type of account, so we suggest doing your research when selecting which bank to open an account at.

Treasury bills

Commonly known as T-bills, treasury bills are short-term (one year or less) debt securities of the federal government with maturities of four, eight, 13, 26 or 52 weeks.¹¹ They are usually sold in denominations of $1,000, issued at a discount to par, but redeemed at par value. T-bills do not pay regular coupon payments like you might receive from a typical bond, but they will pay the stated interest rate at the maturity date listed on the bond. Because they don’t pay regular coupon payments, they are issued at a discount to par (i.e., a price that’s lower than the T-bill’s face value). T-bills are auctioned by the government on a regular basis and can be purchased either directly through the TreasuryDirect website or through a bank, broker, or dealer. T-bill rates may change daily for each maturity length.¹²

Some Advantages

• Zero default risk – T-bills are guaranteed by the U.S. government and carry negligible default risk.
• Lower taxes – Interest earned on T-bills is exempt from state and local taxes. The interest is, however, subject to federal taxes.
• Simplistic – T-bills can be bought for as little as $1,000 and can be bought and sold readily on the secondary market.

Some Disadvantages

• Reinvestment risk – T-bills are short-term securities and the rate you lock in when you purchase a T-bill won’t last for longer than a year.
• Lack of coupons – During your holding period, T-bills don’t make coupon payments as bonds do, which could be a desirable feature for cash flow purposes.
• Interest rate risk – If interest rates rise after you purchase a T-bill, the T-bill you purchased becomes less attractive and its value will fall below par.

We believe money market mutual funds, certificates of deposit, high-yield savings accounts and treasury bills are all viable options for short-term cash needs, such as money allocated for an upcoming tax payment or funds set aside for a house down payment. As always, consult with your Corient Private Wealth Advisor, who is aware of your specific situation and upcoming cash needs, and can help select an appropriate vehicle for you.

¹ https://www.fidelity.com/learning-center/investment-products/mutual-funds/what-are-money-market-funds
² https://www.investopedia.com/terms/s/seven-day-yield.asp
³ https://www.nytimes.com/2023/04/21/business/money-market-funds.html
⁴ https://www.fidelity.com/learning-center/investment-products/mutual-funds/what-are-money-market-funds
⁵ https://www.nytimes.com/2022/06/10/business/inflation-money-market-funds-rates.html
⁶ https://www.thebalancemoney.com/expense-ratios-paying-much-2388663
⁷ https://www.investopedia.com/terms/c/certificateofdeposit.asp
⁸ https://www.fdic.gov/resources/bankers/national-rates/
⁹ https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp
¹⁰ https://www.nerdwallet.com/best/banking/high-yield-online-savings-accounts
¹¹ https://www.investopedia.com/terms/t/treasurybill.asp#:~:text=T%2DBill%20Maturities,will%20pay%20to%20the%20investor.
¹² https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_bill_rates&field_tdr_date_value_month=202304

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