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Your Cash Is Earning Even Less At One Online Broker After The Fed’s Rate Cut
FYI: The Federal Reserve’s latest rate cuts are taking yields back down to nearly zero percent at online brokers.
TD Ameritrade reduced the interest it pays on cash sweep deposits by 0.03 of a percentage point on balances under $200,000. The annual percentage yield on cash at TD now ranges from 0.01%-0.04%.
Sigh. And they make it cumbersome to use cash-like ETFs or funds to hold cash b/c they'll charge short-term redemption fees, even if they're on the NTF list. I've since gone to using t-bills for cash, just on principle, as a way of saying f-you to them.
And yes they do offer 'proprietary' funds and other funds with higher yields for those holding $1M or more in cash....though the latter ones still get hit with the short-term redemption fees, I understand.
Don't just call it a 0.03% rate cut. Hype it, like index funds do when comparing their ERs. It's not a 0.03% reduction, it's a 60% drop in interest paid, from 0.05% to 0.02% for balances between $25K and $100K. https://www.tdameritrade.com/pricing/margin-and-interest-rates.page
Like rforno, I've been using short term T-bills for cash. But even those yields have been dropping fast. Given that one can usually move cash from an internet bank to a brokerage in a day via ACH (for investment, not withdrawal), that seems like a good way to go for the moment.
If you like Treasuries (e.g. you're living in a high income tax state) and can meet the high $50K min, Vanguard's Treasury MMF VUSXX is currently paying 1.93% (SEC yield), with an APY of 1.95%. A problem with Vanguard is that they don't let you pull the cash from there into your TD Ameritrade (or other brokerage) account. Rather, you have to push from the Vanguard side, which means that access to the cash takes a bit longer. https://investor.vanguard.com/mutual-funds/profile/VUSXX
@msf: I believe my brick & mortar will do this also. If you transfer money on Monday it would be available Tuesday. Is this considered 1 or 2 days ? Thanks for the VG tip. Derf
That is surprising that Ameritrade doesn't have a MM to stash cash. Schwab's MM, SWVXX, continues to drop. It's at 1.84% now. Was at least a 1/2% more earlier this year.
@MikeM This is how these organizations make extra cash on accounts. From a few folks I know who have managed accounts that are "sweep" type; they're losing money on this feature all day and night long. Many don't know this could be otherwise. And for the individual investors who do not have default money market accounts for sale proceeds monies, what a hassle to "force" money into a money market or similar fund. Look at the spread noted above......the .03% yield on a sweep holding. It all adds up in the end, as to whose pocket the money flows,eh?
My sleeve of money market mutual funds over the past year has had an average TTM yield of 2.2% with its 30 day current yield computed to be 2.16%.
In comparison, my three step CD Ladder has a current yield of 2.6%.
I'm now keeping very little invested in my broker's cash account due to its low yield of 0.55%; but, it beats what my bank is paying at 0.12% on my savings account.
Where did you find CD ladder with 2.6% yield? Many brokerage such as Fidelity offers 5 years ladder (4 CDs) with 1.88%. A sizable reduction after Fed rate cut.
I don't pay attention to MM or CD and all my cash sub is usually in HY munis. In 2018-9 I have used OPTAX and ORNAX. Sure, I know the risk and volatility and still invest in HY Munis. I invested usually at 99+% in stocks+bond OEFs and none are cash,MM,CD investments. I just keep several thousand which is about 2 months of our expense in the last 30 years while I was working and now at retirement. If we need more I just sell shares.
It would be difficult to construct the CD Ladder that I presently have with current CD rates being what they are. My ladder was built over time. And, I'm not sure I'll roll the one I have maturing come December as its current rate is 2.55% and a replacement, with like maturity, is at 1.80%. With this, currently my money market mutual funds offer the better deal should I choose to keep the money inside the cash area of my portfolio. I might look outside the cash area for opportunity for placement of this money coming due and take on more risk in return for better yield. Not sure at this time what I'll do. Something to ponder.
It seems to me the real ramifications here are for the other riskier markets. Two reasons:
(1) These low cash rates are encouraging investors to take on risks they’d normally not assume were cash yielding a decent return - maybe in equities, maybe in duration, maybe in credit quality. Over-inflated asset prices are always problematic.
(2) Some risk assets are highly dependent on stable or declining interest rates and don’t do so well when rates are rising. Especially vulnerable are real estate, utilities, intermediate and long duration bonds.
Comments
And yes they do offer 'proprietary' funds and other funds with higher yields for those holding $1M or more in cash....though the latter ones still get hit with the short-term redemption fees, I understand.
https://www.tdameritrade.com/pricing/margin-and-interest-rates.page
Like rforno, I've been using short term T-bills for cash. But even those yields have been dropping fast. Given that one can usually move cash from an internet bank to a brokerage in a day via ACH (for investment, not withdrawal), that seems like a good way to go for the moment.
If you like Treasuries (e.g. you're living in a high income tax state) and can meet the high $50K min, Vanguard's Treasury MMF VUSXX is currently paying 1.93% (SEC yield), with an APY of 1.95%. A problem with Vanguard is that they don't let you pull the cash from there into your TD Ameritrade (or other brokerage) account. Rather, you have to push from the Vanguard side, which means that access to the cash takes a bit longer.
https://investor.vanguard.com/mutual-funds/profile/VUSXX
Thanks for the VG tip.
Derf
Fidelity default money market choices with yields
This is how these organizations make extra cash on accounts. From a few folks I know who have managed accounts that are "sweep" type; they're losing money on this feature all day and night long. Many don't know this could be otherwise.
And for the individual investors who do not have default money market accounts for sale proceeds monies, what a hassle to "force" money into a money market or similar fund.
Look at the spread noted above......the .03% yield on a sweep holding.
It all adds up in the end, as to whose pocket the money flows,eh?
My sleeve of money market mutual funds over the past year has had an average TTM yield of 2.2% with its 30 day current yield computed to be 2.16%.
In comparison, my three step CD Ladder has a current yield of 2.6%.
I'm now keeping very little invested in my broker's cash account due to its low yield of 0.55%; but, it beats what my bank is paying at 0.12% on my savings account.
Where did you find CD ladder with 2.6% yield? Many brokerage such as Fidelity offers 5 years ladder (4 CDs) with 1.88%. A sizable reduction after Fed rate cut.
It would be difficult to construct the CD Ladder that I presently have with current CD rates being what they are. My ladder was built over time. And, I'm not sure I'll roll the one I have maturing come December as its current rate is 2.55% and a replacement, with like maturity, is at 1.80%. With this, currently my money market mutual funds offer the better deal should I choose to keep the money inside the cash area of my portfolio. I might look outside the cash area for opportunity for placement of this money coming due and take on more risk in return for better yield. Not sure at this time what I'll do. Something to ponder.
Skeet
That was my point that CDs are paying very little, even dip below MM. This trend is not so favorable for those the income investors.
(1) These low cash rates are encouraging investors to take on risks they’d normally not assume were cash yielding a decent return - maybe in equities, maybe in duration, maybe in credit quality. Over-inflated asset prices are always problematic.
(2) Some risk assets are highly dependent on stable or declining interest rates and don’t do so well when rates are rising. Especially vulnerable are real estate, utilities, intermediate and long duration bonds.
Happy investing.