Cash No Longer Trash?

It looks like we are going to get one of those "Sit around and wait for the FOMC" days. While we await the likely "Nothin’ Done" verdict, it may be a good time to revisit an overlooked asset class:


Currently, you can get near 5% (risk free principle) for cash. For many investors, that is an attractive alternative to risk in equities and long term commitments of bonds.

Note that these rates are not fixed, and may very well be appreciably lower in the event the Fed begins cutting (Best guess, later 2H, most likely). The primary risk of cash is missing the opportunity to lock in a higher rate if that happens. The flipside is CD rates will also go higher if the Fed tightens further.

Today’s Journal has an article about the very subject: Interest-Rate Outlook Adds Luster to Cash. Here’s a quick excerpt:

"Cash is regaining some of its sparkle. With the Federal Reserve widely expected to leave short-term rates unchanged today — and well into the future — many financial planners are recommending that clients put their extra money into short-term securities and high-yielding savings accounts to boost their returns.

That’s a shift from last fall, when money managers were moving into longer-term investments to lock in still-favorable yields. Banks, too, are beginning to change course. After trimming yields on cash accounts last fall, some banks are bumping up rates again to lure new deposits.

Earlier this week, for example, HSBC Holdings PLC’s online bank unit, HSBC Direct, boosted the promotional rate on its online savings account to 6% on new deposits until the end of April, from 5.05%.

Another advantage of moving to more-liquid investments: Doing so can give you the flexibility to quickly move into higher-yielding securities if and when interest rates start to move higher.

A raft of stronger-than-expected economic data and shifting rate expectations are spurring the move toward cash. Oil and gas prices have retreated, easing concerns over a slowdown in consumer spending. Sales of new homes increased in December for a second consecutive month, raising hopes that the worst of the housing downturn could be coming to an end. Meanwhile, the unemployment rate is still relatively low, and the manufacturing sector is proving to be healthier than expected."


Interest-Rate Outlook Adds Luster to Cash
With Fed Expected to Sit Tight, Financial Planners Steer
Clients to Short-Term CDs, High-Yield Savings Accounts

WSJ, January 31, 2007; Page D1

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What's been said:

Discussions found on the web:
  1. Metroplexual commented on Jan 31

    I got a 13 month CD at WAMU for 6% APY back in September (could have gone 18 mo). I am looking for similar or better now and cant find it.

  2. dblwyo commented on Jan 31

    For what it’s worth total return is not compound return. 6% for five years gives you a multiplier of 1.34, or 34%, while an 8% return yields 47%. That’s often a source of confusion. As it happens, just briefly browsing, short- and intermediate-term bond funds the later are showing returns of upto 8% and the former around 5%.

    In any case, if cash itself is 5-6%, what equity investment is likely to yield that ? Especially with PEs where they’re at and a slowing economy likely to lead to lower earnings ?

    In my book that would suggest parking profits while we see what happens on the one hand. And wondering what the ‘smart’ people think they’re getting by buying in now ?

    Let me confess my puzzlements

  3. bc commented on Jan 31

    Some good resources: has a ton of detailed rate info. is a good blog that has
    frequent rate-change updates.
    has a sortable rate list and rate-change history.

  4. metroplexual commented on Jan 31

    When we were getting the CD the bank manager was telling us about the weekly calls from Bankrate to get their rates. They said they sometimes jerked them around because they were getting to know the voice and the # because of caller ID. That month, Bankrate never had the WAMU 6% published.

  5. Phil Katz commented on Feb 9

    That is intersting; ‘cuz Washington Mutual or WaMu in their WA home state is presently (2/9/07) unrated ie unlisted (!!) in the star system on (Washington Mutual is rated in Nevada and Utah only.)

    Is it possible Bankrate got tired of game-playing by WaMu and dropped them.

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