Make your cash work harder as interest rates rise

Cash is not king, but it is no longer rubbish.

My column last week about the meager interest rates offered by money market funds led to a stream of requests from readers asking how to earn higher interest rates on cash.

With equities falling around 10% in 2022 and the bond market embarking on its worst annual start in more than half a century, it suddenly sounds fine to earn even a mildly positive return on safe assets.

Here are a few suggestions, starting with what you should not do.

Financial advisors often recommend ultra-short-term bond funds and bank loans (also called variable rate or senior loans) as if they were cash substitutes. They are not.

These funds can hold corporate debt, sometimes below investment grade, and are not immune to rising interest rates. Many charge fees of over 0.5%. So far this year, ultra-short-term funds have lost an average of 0.9%, according to Morningstar; the average bank loan fund has fallen 0.65 per cent. Cash does not behave like that.

So what should you do?

Next week, the Treasury will announce its latest interest rate on inflation-linked savings bonds or I-bonds. The annual return for the next six months is likely to be 9.6%.

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

I-bonds, introduced in 1998 as a way to shield savings from inflation, pay a fixed interest rate (currently zero) plus a variable interest rate, adjusted at the beginning of each May and November, reflecting changes in the Ministry of Labor’s consumer price index. With the CPI on fire in March at 8.5% above last year’s level, I bond yields will rise next week from their current 7.12%.

You must have I-bonds for a minimum of one year, and you lose three months’ interest if you sell within five years.

There is an investment that is 100% supported by the US government, never loses its value and pays more than 7% in interest per year. So why have most Americans not heard of Series I Savings Bonds? WSJs Dion Rabouin explains. Photo: TNS / Zuma Press

So I-bonds are smaller than cash, but they are also more. Your principal has the full support of the US government, interest is exempt from state and local income tax, and you can defer federal income tax until you collect your I-bonds (or until they expire in 30 years).

In bonds have deficiencies.

You can only purchase them from the US Government on its archaic and squeaky TreasuryDirect.gov website. The annual limit is $ 10,000 per person annually (though you can also take up to $ 5,000 of your federal income tax refund in the form of paper I bonds).

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John Schalk, a 58-year-old retired information technology project manager in Bloomington, Ill., Is exploring another option to get more out of cash.

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

For years, he kept much of it in short-term, floating-rate bonds issued by a subsidiary of his former employer, Caterpillar Inc.,

recently with a return of 0.35 per cent.

Now, however, Mr. Schalk plans to move into 3-month U.S. Treasury bills, which he will buy on TreasuryDirect at equal intervals on May 1, June 1 and July 1. He will sign up to automatically reinvest them in new Treasury bills as they mature.

That way, he benefits if interest rates rise over time and avoids the risk of having long-term debt. Three-month Treasury bills yielded about 0.82% this week.

“It’s not sexy,” says Mr. Schalk, “but it should be very safe and improve my return considerably.”

A few exchange traded funds, iShares Treasury Floating Rate Bond and WisdomTree Floating Rate Treasury, offer a way to grab rising short-term interest rates.

The WisdomTree ETF has the four most recently issued floating rate bonds from the US Treasury Department. These instruments expire two years after they are issued, but they pay variable interest rates that are reset every week with the most recent 3-month Treasury auction.

Over time, the ETF’s dividend should approach that of the federal funds rate, says Kevin Flanagan, head of interest rate strategy at WisdomTree Investments Inc.

It is the benchmark for overnight bank lending that the Federal Reserve uses to modulate interest rates.

So the fund’s return, now around 0.5%, should keep pace if short-term interest rates continue to rise.

Finally, do not take your bank’s miserable interest rates lying.

MaxMyInterest.com, an online service, automates the process of opening accounts in your name, each with $ 250,000 in Federal Deposit Insurance Corp. coverage, at banks that offer high-yield savings accounts.

Max is not a bank and does not have access to your money. Instead, it acts as a switchboard that mediates transfer requests to direct your deposits between the eight online banks in its network, ensuring you get the best mix of income and FDIC insurance.

Gary Zimmerman, Max’s founder and CEO, says its average customer allocates $ 200,000 to $ 400,000 in cash, though account sizes range from $ 20,000 to $ 10,000,000.

This week, Max offered returns on savings accounts up to 0.82%. It does not count Max’s annual fees of 0.08% (accounts with $ 60,000 or less pay a fixed $ 48). A checking account, managed by LendingClub Bank,

pays 0.2% in interest.

Nationwide, banks have more than $ 18 trillion in deposits; money market funds, an additional $ 4.5 trillion. It’s a whole lot of money that earns a whole lot of almost nothing.

When interest rates rise, you should also get your money moving.

Write to Jason Zweig at intelligentinvestor@wsj.com

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