Interest rates

Making your money grow as interest rates rise

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

My column last week about the meager returns offered by money market funds sparked a flurry of inquiries from readers asking how to earn higher rates with cash.

With stocks down around 10% in 2022 and the bond market off to its worst annual start in over half a century, earning even a slightly positive return on safe assets suddenly seems very good.

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

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

These funds may hold corporate debt, sometimes below investment grade, and are not immune to rising rates. Many charge fees above 0.5%. So far this year, very short-term funds have lost an average of 0.9%, according to Morningstar; the average bank loan fund is down 0.65%. Cash doesn’t work like that.

So what should you do?

Next week, the Treasury will announce its latest rate on inflation-protected savings bonds, or I’m reading. The annualized return for the next six months will likely be 9.6%.

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

Introduced in 1998 In order to protect savings against inflation, I bonds pay a fixed rate (currently zero) plus a variable rate, adjusted at the beginning of each May and November, which reflects changes in the price index at consumption of the Ministry of Labour. With the CPI on fire in March at 8.5% from last year’s level, bond I yields will rise next week from their current level of 7.12%.

You must hold I bonds for at least one year and you will lose three months of interest if you sell before five years.

This is an investment that is 100% backed by the US government, never loses its value and earns over 7% interest per year. So why haven’t most Americans heard of Series I savings bonds? The WSJ’s Dion Rabouin explains. Photo: TNS/Zuma Press

So bonds are less than cash, but they are also more. Your principal is fully supported by the U.S. government, interest is exempt from state and local income tax, and you can defer federal income tax until you cash in your I Bonds (or until their maturity in 30 years).

I bonds have gaps.

You can only buy them from the US government on its archaic and squeaky website. The annual limit is $10,000 per person per year (although you can also withdraw up to $5,000 of your federal income tax refund in the form of paper I bonds).


Where do you park your money? Join the conversation below.

John Schalk, a 58-year-old retired IT project manager in Bloomington, Illinois, is exploring another option for making the most of the money.

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

For years, he hid much of that in short-term, floating-rate notes issued by a subsidiary of his former employer, Caterpillar. Inc.,

recent return of 0.35%.

Now, however, Mr Schalk plans to switch to 3-month US Treasuries, which he will buy on TreasuryDirect in equal tranches on May 1, June 1 and July 1. It will undertake to reinvest them automatically in new Treasury bonds. as they mature.

This way, he benefits if rates rise over time and avoids the risk of holding long-term debt. Three-month Treasury bills have returned around 0.82% this week.

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

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

The WisdomTree ETF holds the last four floating rate notes issued by the US Treasury. These instruments mature two years after their issuance, but they pay variable interest which resets each week with the last auction of 3-month Treasury bills.

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

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

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

Finally, you don’t have to accept bad interest rates from your bank., an online service, automates the process of opening accounts in your name, each with $250,000 of Federal Deposit Insurance Corp. coverage, at banks offering high-yield savings accounts.

Max is not a bank and does not have access to your money. Instead, it operates as a switchboard, forwarding transfer requests to route your deposits between the eight online banks in its network, guaranteeing you the best combination of income and FDIC insurance.

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

This week, Max offered savings account yields of up to 0.82%. This doesn’t count Max’s annual fee of 0.08% (accounts of $60,000 or less pay a flat rate of $48). A current account, administered by LendingClub Bank,

pays 0.2% interest.

Nationally, banks hold more than $18 trillion in deposits; money market funds, an additional $4.5 trillion. That’s a lot of money that earns next to nothing.

As interest rates rise, you should move your money too.

Write to Jason Zweig at

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