Cash is no longer trash.
For the first time in 15 years, investors can get nearly 4% yields on U.S. Treasury bills, while rates on some money-market funds have hit 2% and likely are heading higher. These yields were around zero at the start of 2022.
The rate rise helps formerly yield-starved savers who have suffered for most of the past decade and a half with sub-1% short-term yields. Savers may finally get positive inflation-adjusted yields in the coming year. While consumer prices have risen 8.3% in the past year, the most recent monthly readings have been close to zero.
The added income on the enormous pool of money-market funds and other short-term bond assets also could provide a lift to the economy. One loser is the U.S. government, which is paying more on its borrowings.
Other beneficiaries from higher short rates are cash-rich companies like Berkshire Hathaway (Ticker BRK/A, BRK/B),
(GOOG, GOOGL) and
Berkshire, for instance, was sitting on more than $100 billion in cash and equivalents, including about $76 billion in Treasury bills, at the end of June. A risk-averse Berkshire CEO Warren Buffett prefers to keep the bulk of Berkshire’s cash in T-bills.
The income from Berkshire’s cash holdings now is running at a $3 billion-plus annual rate, up from nearly nothing in 2021 when T-bill rates hovered just above zero. Apple had $179 billion of cash and equivalents on June 30 while Microsoft had $105 billion and Alphabet, $125 billion (including marketable securities).
The rise in rates on short-term securities and funds reflects the Federal Reserve’s move this year to lift the key fed-funds rate to a current range of 2.25% to 2.5% from near zero. An increase of 0.75 percentage point is expected at the Fed’s next meeting of policy makers next week. Based on the CME FedWatch tool, bond-market participants are anticipating that the Funds rate will top 4% by year end.
Investors now can get a rate of 3.18% on the three-month T-bills, 3.78% on six-month T-bills and 3.92% on one-year bills, according to Bloomberg. The one-year T-Bill has one of the higher Treasury yields. The 10-year note, for instance, yields 3.4%
Individuals can buy T-bills from banks and brokerage firms or directly at regular auctions through the U.S. Treasury’s TreasuryDirect program. Three- and six-month bills are sold weekly on Mondays while one-year bills are auctioned every four weeks.
One of the benefits of T-bills is that interest is exempt from state and local taxes—a plus in states like New York and California where top income-tax rates exceed 10%. T-bills stack up well versus bank savings accounts and CDs. The highest-yielding one-year CD is about 3% and the average one-year rate is around 0.5%, according to Bankrate.com
Individual investors can also buy T-bills through liquid exchange-traded funds like the $23 billion
iShares Short Treasury Bond ETF
(SHV), which holds Treasuries with an average maturity of about four months, and the $20 billion
The iShares SHV ETF has a 30-day yield of 2.5% based on a Securities and Exchange Commission methodology. The SPDR Bloomberg BIL ETF’s SEC yield is 2%.
Investors willing to take slightly more interest-rate risk can buy the
iShares 1-3 Year Treasury Bond ETF
(SHY) with an average maturity of around two years and SEC yield of 3.3%. The $42 billion
Vanguard Short-Term Corporate Bond ETF (VCSH) carries an SEC yield of more than 4% and an average maturity of 3
years. The Vanguard fund holds investment-grade corporates with the bulk carrying single-A or triple-B ratings.
“Investors recognize that as the Fed increases rates, the ETF portfolios will turn over and the bonds entering the portfolio will come in at higher yields,” says Steve Laipply, the U.S. head of bond ETFs at
which runs iShares. This should boost yields on bond ETFs, particularly those with shorter maturities.
Investors have plowed money into Treasury ETFs this year to take advantage of the sharp increase in yields. The iShares SHV ETF, for instance has taken in $10 billion this year and the iShares SHY ETF has had inflows of about $6 billion, according to iShares.
Money-market fund yields also are rising. The huge, $216 billion Vanguard Federal Money Market Fund (VMFXX) now has an SEC yield of 2.15% and that yield probably is heading higher.
Write to Andrew Bary at [email protected]