Summary
- The equity markets are forecasted to drop more in 2023.
- The federal reserve is expected to raise interest rates further, and the interest rates to be at 5% by the end of the year (2023).
- Vanguard forecasts the US equity market to have a 10-year annualized return rate of 4.7-6.7%.
- High-yield savings, money market funds are being viewed as a relatively safe place for short-term parking of cash with current APYs of up to 3.5%.
- Short-term T-bills may be another relatively safe and relatively liquid place to park cash with current annualized yields of up to 4.73%.
- Current non-callable short-termed brokered CD rates are not as attractive as the other listed options, with yields of roughly to 4.10%.
- Any data or content presented is not intended to provide financial, investment, or any other type of advice. Read full disclaimer here.
The year 2022 was a rough year for both the equity and bond markets: 20+ year treasury ETF TLT dropped by 30%, 7-10 year bond ETF IEF dropped by 16%, S&P500 fell by 20%, and the Nasdaq fell by roughly -35%. Meanwhile, the federal reserve has signaled more rate hikes with an implied interest rates raising to 5.125% this year in 2023, and Vanguard prediction of interest rates being at 5% by year's end in 2023.
In their recently published economic outlook for 2023 Vanguard predicts that
[...] central banks may reasonably achieve their 2% inflation targets only in 2024 or 2025
and that most central banks will be
[...] reluctant to cut rates in 2023 given the need to cool wage growth
The report also predicts the 10-year annualized returns for the US equity markets are projected to be 4.7-6.7% while
Equity markets have yet to drop materially below their fair-value range, which they have historically done during recession.
With the lowered forecasts for US equity markets and forecasted maintained higher interest rates through 2023, one may consider parking their cash in low(er) risk fixed-income options.
The table below summarizes some of the current short-term options with their current (as of this writing) annualized yields for savings accounts, money market funds, t-bills, and CDs.
| Duration (months) | Type | Annualized Yield (%) | Backing |
|---|---|---|---|
| 1 | T-bill | 3.86 | US Government |
| 3 | T-bill | 4.41 | US Government |
| 6 | T-bill | 4.66 | US Government |
| 12 | T-bill | 4.73 | US Government |
| 1 | CD* | 1.96 | FDIC |
| 3 | CD* | 3.41 | FDIC |
| 6 | CD* | 4.10 | FDIC |
| 12 | CD* | 4.10 | FDIC |
| - | Money Market Fund | 4.27 | - |
| - | Savings Account* | 3.50 | FDIC |
Following sections describe each of the above options in more detail.
High-Yield Savings Accounts
With rising interest rates, we are seeing an increase in annual percentage yield (APY) in FDIC-insured "high-yield" savings account. Savings account APYs from selected banks are summarized below, which go as high as 4.11%. But the higher advertised APYs seem to be inversely correlated with their ratings (e.g. from DepositAccounts reviews). Due to the lowered reviews of higher interest accounts, the current practical APYs for savings accounts is assumed to be around 3.50%.
| Bank | APY | DepositAccount Rating |
|---|---|---|
| Barclays | 3.40% | 4.0/5 |
| American Express National Bank | 3.30% | 4.0/5 |
| Discover Bank | 3.30% | 3.0/5 |
| CIT Bank | 3.85% | 2.5/5 |
| Marcus by Goldman Sachs | 3.30% | 2.5/5 |
| Lending Club Bank | 3.60% | 1.5/5 |
| UBF Direct | 4.11% | 1.5/5 |
FDIC-insured saving account interest rates are variable and are subject to change. But with rising interest rates, they are expected to either remain at the current levels or increase in 2023. Also, the deposited money is insured up to the allowable amount by FDIC and hence have little risk. Besides some possible restrictions such as cap on the maximum number of transactions per month, the deposits are very liquid.
Certificate of Deposits
A Certificate of Deposit (CD for short) is financial product that that typically pays a fixed interest rate for a pre-set period of time. The deposited money earns interest at fixed intervals during the CD's term. Unlike savings accounts, the deposited money cannot be removed without a penalty (subject to other possible terms such as survivor's option) during the term of the CD. FDIC-insured CDs are viewed as relatively safe options as the deposits are insured by FDIC up to the allowable limit.
Callable CDs generally offer a higher interest, but with the caveat that they give the option of being redeemed by the issuer prior to their maturity at a preset price by the issuer. Callable CDs can lowered your expected earned interest in an environment where you expect interest rates to fall.
Some brokers offer purchasing brokered CDs offered from other banks. The figure below shows a summary of various FDIC-insured non-callable brokered CDs with a maturity of up to 1 year available from Schwab.
This graph shows that the current offered rates for the (relatively) short term CDs do not seem to be worth the small interest gains compared with FDIC-insured savings accounts offering current APYs of up to 3.5%.
Treasury Bills
The US government sells new issued treasury bills (T-bills) during auctions at scheduled times published here on the treasury's website.
The current T-bill rates are the highest they have been since 2008 with the 1-year T-bills reaching yields of roughly 4.7% while the 3-month T-bills are reaching annualized yields of roughly 4.4%.
Purchase orders for issued T-Bills can be placed starting on the 'announce' date listed on the above document from your broker in what's known as a non-competitive bid on the day of the action listed in the document above. These orders will not be filled until the auction date. The exact purchase price will not be known at the time you place your order. The broker will, however, show the expected purchase price of the T-bill which will be labeled as 'evaluated price'.
The steps below summarizes the process
- Announce date: T-bills listed on broker site starting on the 'announced auction date' and begin listing their expected purchase price on the auction date as evaluated price. Customers can place orders but they will not be filled until the auction date.
- Auction date: Banks engage in competitive bidding for T-bills on the 'auction date' and are marked up. The actual purchase price becomes known at this point.
- Brokers offer and fill customers purchase orders for T-bills via non-competitive bidding. The discount purchase price from par value of the T-bill determines the actual yield of the T-bill. For example, you may pay $98.5 for a T-bill with a par-value of $100.
- At maturity the T-bill holder will receive the par value of the T-bill.
There is no coupon and the interest will only be paid at maturity. The annualized interest is determined from the discounted price when the treasury pays the T-bill at its par value. Consider the following example:
- A broker advertises an 'evaluated' price of $98.5 for a 3-month T-bill with a par value of $100.
- Customer places an order for 10 T-bills totalling $1000
- Order is filled for $98.6 per T-bill on the auction date
- The annualized yield of the T-bill is then determined as
(100-98.5)/(98.5) * 365/(~90 days)
The brokerage will likely not use "90" days, but instead use the number of days between the date of the maturity of the T-bill from the settlement date.
Since T-bills are "backed by the full faith and credit of the United States government", they are viewed as some of the safest short-term options for parking cash. While treasuries have a fixed maturity date, they can be traded on secondary markets if one wishes to get their money back.
While there has been renewed concerns about treasury market liquidity as the fed is unwinding its balance sheet while China and other countries have been selling US treasuries, these concerns may not be as significant if buyers are holding treasuries to maturity.
Money Market Funds
Money market funds are mutual funds that invest in liquid short-term financial instruments such as short-term treasury bills mentioned in the previous sections.
Unlike CDs, money market funds are not FDIC insured, and unlike treasury bills, they are not backed by the US government. While money market funds are often viewed as very low risks a liquid place to park cash, under adverse market or economic conditions they may be subject to various types of risks including liquidity and redemption risks. During the 2008 Great Financial Crisis (GFC), we saw the Reserve Primary Fund break the buck and liquidated as a result, as well as the 2020 money market bail-out. As always, you should read the prospectus of the funds, which include various risks such as redemption risks:
The fund may experience periods of heavy redemption that could cause the fund to liquidate its assets at inopportune times or at a loss or depressed value, particularly during periods of declining or illiquid markets.
Similar to savings account yields, the the yield of money market funds are variable. Since these yields are variable, the funds report a "7-day yield" which is the annualized yield of the money market fund calculated from its previous 7 day yield history. Unlike savings account, CDs, and T-bills, money market funds do carry an expense ratio. Table below shows some selected money market funds offered by Schwab and their current 7-day yield as well as expense ratio.
| Fund Ticker | 7-day yield (%) | Expense Ratio (%) |
|---|---|---|
| SWVXX | 4.27 | 0.34 |
| SNOXX | 3.96 | 0.34 |
| SNVXX | 3.91 | 0.34 |
| SCAXX | 2.87 | 0.19 |
