Finding Yield for Short-Term Investments

By Alex Albert, CFP®

Highlights

• Interest for high-yield savings accounts and CDs are on the rise
• Bonds and treasuries are worth close consideration

Estimated read time: 3 mins

The Federal Reserve is fighting tirelessly to control inflation by aggressively raising the Fed Funds (short term) interest rate, and letting longer-term rates rise as it pivots from being a buyer of bonds to letting its portfolio shrink.

With these actions, interest rates on consumer and commercial loans of all types have risen sharply, including new mortgages recently topping over 7%. In contrast to borrowers, interest paid to savers and investors of fixed-income securities and products have risen everywhere– except in your bank account. While inflation in the U.S. was 8% year-over-year at the end of August, according to Bankrate.com, the average annual savings rate was only 0.14%.

Savings Accounts and CDs are Increasingly Attractive

When looking to invest short-term cash, three key factors to consider are safety, liquidity, and yield. For most, having short-term cash readily available is necessary, and we recommend keeping at least 6 months’ worth of expenses liquid to cover unforeseen expenses.

As of this writing, high-yield savings accounts have increased their interest rates to over 2%. Note that rates fluctuate, and each banking institution sets its own rules to consider, such as account minimums, limits on withdrawals, and fees, but most are backed by FDIC insurance up to $250,000 per depositor account.

Rates on Certificates of Deposit (CD’s) have become more attractive and are readily available through banks and brokerage firms. CDs by qualifying institutions have FDIC insurance and, in return for paying higher interest rates, CD funds must not be withdrawn for a certain period without penalties or loss of interest. CDs are best used when you marry a predetermined expense with a corresponding date and dollar amount.

Bonds and Treasuries Look Even Better

Series I Savings Bonds (I-Bonds) are a safe and attractive place to invest a limited amount of funds. Currently yielding over 9.6% annually, these U.S. Government-issued securities have yields fluctuate with the inflation rate, which the Federal Reserve is actively working to lower down to 2%, and there is a maximum investment of $10,000 per year per person. After 12 months, you can cash in your I-Bonds; however, if cashed in before year 5, you lose the last 3 months of interest.

Another attractive option is direct Treasury paper, which is backed by the full faith and credit of the U.S. Government. Treasuries range from Treasury bills (T-Bills), which mature in 1-year or less, Treasury notes (2-10 years), and Treasury bonds, which have maturities of 20 to 30 years. The interest from Treasuries is state income tax exempt.

Yields on a 1-year Treasury as of October 7, 2022, was 4.24%, and 3.89% on a 10-year, both of which have not been this high in over 12 years. Treasuries can be bought and sold without penalty; however, their prices fluctuate daily and selling prior to maturity may result in a loss.

Final Thought

While stocks remain our asset class of choice for dividend income, growth of income, and long-term capital appreciation, current interest rates on fixed-income securities (bonds) are a welcome sight for holders of cash and those seeking decent returns without risk of capital.

As always, feel free to contact us should you have any questions or need assistance in any manner.

About the Author

Alex Albert is a Certified Financial Planner for East Greenwich-based Lincoln Capital, a financial planning and wealth management firm. He is a graduate of the University of Rhode Island and earned CFP® certification from Bryant University.