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Make your cash work harder as interest rates rise


Cash isn’t king, but it’s no longer trash.

My column last week based on the measured returns offered by money market funds has spurred a large volume of requests from readers asking how to earn higher cash rates.

With stocks down about 10% in 2022 and the bond market having its worst annual start in more than half a century, making even a positive return on safe-haven assets suddenly sounds a bit overwhelming. good.

Here are a few suggestions, starting with what you shouldn’t do.

Financial advisors often recommend ultra-short-term bond funds and bank-loan funds (also known as floating-rate or premium loans) as if they were an alternative to cash. They are not.

These funds can hold corporate debt, sometimes below investment, and are not immune to rising rates. Many fees collected exceed 0.5%. So far this year, ultra-short-term funds have lost an average of 0.9%, according to Morningstar; average bank loan decreased by 0.65%. Cash doesn’t work like that.

So what should you do?

Next week, the Treasury will announce its latest rates on inflation-protected savings bonds, or I link. Annual return for the next six months will probably be 9.6%.

Yes, that’s 9.6%, nine point six percent.

Introduced in 1998 As a way to protect savings against inflation, bond I pays a fixed rate (currently 0) plus a variable rate, adjusted at the beginning of each May and November, to reflect changes in the consumer price index of the Ministry of Labor. With CPI on fire at 8.5% from last year’s level in March, yields on I bonds will rise next week from the current 7.12%.

You must hold Bond I for a minimum of one year, and you will lose interest for three months if you sell it five years in advance.

Have an investment that is 100% US government backed, never loses value and is paying more than 7% interest a year. So why haven’t most Americans heard of a Series I Savings Bond? WSJ’s Dion Rabouin explains. Photo: TNS / Zuma Press

So my bonds are less than cash, but they are also more. Your principal is fully backed by the U.S. government, the interest is exempt from state and local income taxes, and you can defer federal income taxes until you withdraw the funds with your I bond. themselves (or until they mature in 30 years).

I bond has shortcomings.

You can only buy them from the US government with old and unwieldy items TreasuryDirect.gov website. The annual limit is $10,000 per person annually (though you can also receive up to $5,000 in your federal income tax refund as an I paper bond).

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John Schalk, a 58-year-old retired IT project manager in Bloomington, Ill., is exploring another option for raising more money.

Mr. Schalk says he is a conservative investor, with about 7% of his portfolio in cash.

For many years, he kept most of it in short-term floating rate issued by a subsidiary of his former employer,

Caterpillar Inc.,

recently yielded 0.35%.

Now, however, Mr. Schalk plans to switch to 3-month U.S. Treasury bills, which he will buy on Treasuries, in equal amounts on May 1, June 1 and May 1. 7. You will sign up to automatically reinvest them into new T-bills. when they mature.

That way, he benefits if interest rates rise over time and avoids the risk of having to hold on to long-term debt. 3-month term Treasury bill yield about 0.82% this week.

“It’s not sexy, but it’s very safe and greatly improves my return on investment,” Mr. Schalk said.

Some exchange-traded funds,

iShares Treasury Floating Rate Bonds

and

WisdomTree Floating Rate Treasuryoffer a way to achieve rising short-term rates.

The WisdomTree ETF holds four of the most recently issued floating-rate bonds from the United States Department of the Treasury. These instruments mature two years after they are issued, but they pay variable rates that reset weekly with the most recent 3-month bill auction.

Over time, the ETF’s yield will approximate the federal funds rate, said Kevin Flanagan, head of fixed income strategy at

Investing in WisdomTree Inc.

It’s the overnight bank lending standard that the Federal Reserve uses to adjust interest rates.

So the fund’s yield, currently around 0.5%, will have to keep rising if short-term rates continue to rise.

Finally, you don’t have to pay the bank’s outrageously high interest rates.

MaxMyInterest.com, an online service, automates the process of opening accounts in your name, each with $250,000 in coverage by the Federal Deposit Insurance Corporation, at banks that provide High yield savings account.

Max is not a bank and has no access to your money. Instead, it acts like a switchboard, transmitting remittance requests to route your deposits between the eight online banks in its network, ensuring you get the best combination of income and FDIC insurance.

Gary Zimmerman, founder and CEO of Max, says their average client allocates $200,000 to $400,000 in cash, although account sizes range from $20,000 to $10,000,000 .

This week, Max offers interest rates on savings accounts up to 0.82%. That doesn’t charge Max’s annual fee of 0.08% (accounts with $60,000 or less pay a flat $48). A checking account, managed by

LendingClub Bank,

pay interest 0.2%.

Nationwide, banks hold more than $18 trillion in deposits; money market funds, another $4.5 trillion. That’s all the money that makes a lot of nothing else.

As interest rates rise, you will also move your cash.

Write letter for Jason Zweig at [email protected]

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