How to maximize what your cash pays even when nothing is paying much of anything now
Got cash?
Maybe you’d love to invest it, but where?
The stock market seems pricy after a 70% rally from the March 2009 lows. And it’s been so up and down lately that it doesn’t inspire much confidence. So maybe stocks are just too risky for you. Or you’re close to retirement or those college tuition payments and can’t take a risk. Maybe you’d just like to wait. Or maybe you just need more income than most stocks pay these days.
Bonds are, well, no bargain. A three month Treasury bill pays just 0.12%. A two-year note pays just 0.79%. Inflation may not be very high at an annual rate of 2.6% for headline inflation (and 1.6% minus volatile energy and food prices) but it’s enough to eat up all the interest from those investments and more. (TIPS, Treasury Inflation-Protected Securities will protect you from inflation but the yields are really low (1.43% for a 10-year TIPS at recent auction) and they only protect you from inflation and not rising interest rates. I-Bonds, a savings bond that pays an interest rate that combines a fixed component, currently 0.3%, with an inflation-adjusted variable rate, current 3.06%, offer a higher yield but since the variable rate is pegged to inflation and not interest rates, the yield on these bonds won’t neceesarily go up if interest rates do. You also have to hold for at least 12 months. (After that and until you’ve held for 5 years you lose the last 3-months of interest when you sell.)
You could lock your money up for decades and get 4.56% in a 30-year Treasury bond but 30 years is forever. And besides interest rates have to go up from today’s lows and that means bond prices will be coming down, probably fast enough to eat up all the interest that bond pays and more.
A certificate of deposit (CD) would make sure you get your invested capital back intact but the highest rates I can find for a one-year CD are 1.88% (at Eastbank) and 1.7% (at Tennessee Commerce Bank). That doesn’t even beat headline inflation.
Might as well keep it buried in the back yard—except that loses out to inflation too.
Here’s my advice: Think short term. It’s the best way right now to maximize long-term income.
Are interest rate hawks pushing policy at the Federal Reserve?
Thursday’s Federal Reserve decision to raise the discount rate, the interest rate banks pay to borrow from the Fed, may not be the “no big thing” that chairman Ben Bernanke and the financial markets (so far) say it is.
The minutes of the January 14 meeting of the Federal Reserve’s board of governors and the regional Federal Reserve presidents released today, February 23, show that interest rate policy hawks may be driving Fed policy faster than Bernanke publicly acknowledges.
Interest rates could stay low for longer than anyone now projects
The Reserve Bank of Australia, the country’s central bank, surprised just about everybody by keeping its benchmark interest rate unchanged today, February 2.
All 20 economists surveyed by Bloomberg had predicted a quarter-percentage-point increase to 4%. Futures markets rated odds of an increase at 74%.
Why do you care if you don’t live in Australia or own much in the way of Australian stock and bonds?
Japan’s huge budget gamble will push up global interest rates
It’s a desperate gamble but Japan’s Democratic Party government, headed by Prime Minister Yukio Hatoyama, doesn’t have much choice.
To break the hold of deflation on the Japanese economy, the country has to spend money—lots of money—it doesn’t have to stimulate an economy that threatens to turn in a third straight year of negative growth in the fiscal 2011 year that begins in April 2010.
The government’s new budget calls for a record $1 trillion in spending for the fiscal year. But it’s not the size of the budget that’s so shocking. Government projections say that tax receipts next year will come to just $405 billion. For the first time since World War II Japan’s government will borrow more than it takes in from taxes.
That new borrowing—an estimated $485 billion—will bring the country’s total debt to $9.4 trillion by the end of fiscal 2011 in March 2011. That will be equal to 181% of the country’s GDP (gross domestic product) by March 2011. In other words Japan will owe almost two year’s worth of the activity of its entire economy.
How big is that debt burden? Let’s look at a few comparisons.
Mr. Bond turns bearish on bonds
Mr. Bond, Pimco’s Bill Gross, doesn’t like bonds so much anymore.
Gross, who manages the $200 billion Total Return Fund at Pacific Investment Management (Pimco) told CNBC on December 7 that Treasuries are over-valued given the odds that inflation and interest rates are headed up.
That wasn’t just talk. Gross increased the cash position in his fund to 7% in November from a negative 7% in October, Bloomberg reported today. (The fund can go to a negative cash position by using derivatives, futures, or short positions.)
That’s the most cash Gross has held since Lehman Brothers collapsed in 2008.
Treasuries have had a tough December, turning in a 1.1% loss for the month so far. That would be the worst monthly performance since April, according to Bank of America’s Merrill Lynch unit.
