Brief Newsletter (email) Article by Lawrence C. Strauss, Barrons
"Nowadays, investors have all sorts of options when it comes to parking their cash.
My colleague Randall Forsyth, a longtime chronicler of the bond market for Barron's, has some thoughts on the subject:
"I've found the best deal had been 4-week T-bills, which had been yielding near the low end of the Fed's former target range of 4.5%-4.75%," Randy observes in an email to me.
On Wednesday, the Federal Open Market Committee boosted short-term rates by another quarter of a percentage point, pushing that target range to 4.75%-5%.
"Now, with the market pricing in Fed cuts and concerns about banks, the latest 4-week bill has sunk below 4%," he continues. "Three months still gets you 4.65%."
Randy posits that another place to park cash is bank certificates of deposit, though investors need to be discerning. "The best deals for safety and liquidity are bank CDs available on the brokerage platforms," he says, having found a 5.05% rate for a three-month CD.
In an article this week, I wrote that income investors should consider cash as well as bonds for the moment. The latter have been volatile, though their returns have been respectable in 2023. The iShares Core U.S. Aggregate Bond ETF has returned about 3.4% this year through March 22, compared with about 3% for the S&P 500.
“It just so happens that right now, the lowest risk, most liquid part of [fixed income] happens to be the highest yielding -- which is cash,” says Gary Zimmerman, CEO of MaxMyInterest."
Comments
...Just saw something else, doing some homework for a friend. They're in Fido. I'm attempting to find out the current interest rate being generated by the Fidelity "Cash Management" account they are saving into. They started out from zero, and their balance is still just a few hundred.
The fine print says that deposits are "swept" into bank accounts? I have a sweep acct. at TRP, but the money is put into Treasuries and repurchase agreements. WTF? The posted rate at Fido is just 2.34%. Am I missing something? TRP "sweep" is offering 4.31% and my own "Personal Rate of Return" since inception is 3.24%.
https://www.fidelity.com/cash-management/fidelity-cash-management-account/overview
A "settlement account" (what Fidelity calls a "core" account) is where the cash comes from to settle all your brokerage transactions (including cash withdrawals). One can think of this as one's checking account.
T. Rowe Price brokerage lets you pick a money market fund to hold your settlement account money. It refers to this fund as a sweep account and provides this description of how the sweep mechanism works. https://www.troweprice.com/content/dam/iinvestor/Forms/accountAgreement.pdf
In contrast, Fidelity uses "sweep" somewhat differently. For nonretirement accounts (except CMA accounts), Fidelity lets you keep your cash in SPAXX (yielding 4.28%) or FZFXX (yielding 4.22%). These operate the same way as T. Rowe Price described above, but Fidelity does not call these "sweep" accounts.
Rather, Fidelity reserves that term for settlement accounts where the money is "swept" into an FDIC-insured bank account (2.32% posted rate; the APY is 2.34%). This is an option for retirement accounts and is mandatory for CMA accounts at Fidelity.
https://www.fidelity.com/trading/faqs-about-account#faq_about2
https://www.fidelity.com/cash-management/fidelity-cash-management-account/overview
At Fidelity, you have the option of having your money FDIC-insured by using a CMA account. But you pay for that insurance in the form of reduced interest. FDIC insurance is not an option at TRP.
Features of CMA accounts Fidelity are slightly different from Fidelity's "regular" brokerage accounts. The most significant CMA advantage that I'm aware of is that Fidelity rebates all ATM fees. In a regular account you need to have a certain level of assets before Fidelity provides unlimited rebates.
FWIW, I use a "regular" Fidelity brokerage account for almost everything and have a CMA account with a few hundred bucks for ATM withdrawals only.