Whither Cash?
IT WASN���T LONG AGO that a saver could make a few bucks in a money market fund. In late 2018, the Federal Reserve had hiked short-term interest rates. By early the next year, Vanguard Federal Money Market Fund (symbol: VMFXX) was sporting a yield near 2.5%.
While it might take years to see that sort of juicy risk-free rate again, market observers now believe the Fed will begin a tightening cycle that will lead to higher short-term interest rates. Investors will get an update from Federal Reserve Chair Jerome Powell during his press conference on Wednesday.
Here���s something you can check today: There���s a nifty tool to view the implied future federal funds rate. Right now, it���s suggesting that a money market account might yield 1% by late 2023 and perhaps even 1.5% three years from now. In other words, don���t get your hopes up for lofty money market and savings account yields just yet.
Concerns over inflation are driving the expectation of higher rates. Just last week, the five-year forward breakeven rate, a measure of expected inflation, climbed to almost 3%, the highest reading in its 18-year history.
What���s strange about the recent jump in inflation fears is that medium-term and long-term Treasury yields are under 2%. Perhaps long-run economic growth expectations are tapering off, and that���s reflected in today���s modest yields. One result: To notch a 4% yield, bond investors are currently forced to own high-yield��junk bonds.
We, as small investors, have an advantage, however.
A lot of ink has been devoted to Series I savings bonds over the past six months���with good reason. The annualized yield, which will be updated tomorrow, is likely to be near 7% through April 2022. Even though that lofty rate likely won���t last long, if the market is correct and inflation averages 3% during the next five years, inflation-linked bonds would beat the pants off a five-year Treasury note, which currently offers just 1.2%.
Since the annual purchase limit is $15,000 per person���$10,000 through regular purchases and $5,000 using a tax refund���it doesn���t make much sense for the super-wealthy to bother with Series I savings bonds. But regular folks might amass a position, while they await better money market rates.
While it might take years to see that sort of juicy risk-free rate again, market observers now believe the Fed will begin a tightening cycle that will lead to higher short-term interest rates. Investors will get an update from Federal Reserve Chair Jerome Powell during his press conference on Wednesday.
Here���s something you can check today: There���s a nifty tool to view the implied future federal funds rate. Right now, it���s suggesting that a money market account might yield 1% by late 2023 and perhaps even 1.5% three years from now. In other words, don���t get your hopes up for lofty money market and savings account yields just yet.
Concerns over inflation are driving the expectation of higher rates. Just last week, the five-year forward breakeven rate, a measure of expected inflation, climbed to almost 3%, the highest reading in its 18-year history.
What���s strange about the recent jump in inflation fears is that medium-term and long-term Treasury yields are under 2%. Perhaps long-run economic growth expectations are tapering off, and that���s reflected in today���s modest yields. One result: To notch a 4% yield, bond investors are currently forced to own high-yield��junk bonds.
We, as small investors, have an advantage, however.
A lot of ink has been devoted to Series I savings bonds over the past six months���with good reason. The annualized yield, which will be updated tomorrow, is likely to be near 7% through April 2022. Even though that lofty rate likely won���t last long, if the market is correct and inflation averages 3% during the next five years, inflation-linked bonds would beat the pants off a five-year Treasury note, which currently offers just 1.2%.
Since the annual purchase limit is $15,000 per person���$10,000 through regular purchases and $5,000 using a tax refund���it doesn���t make much sense for the super-wealthy to bother with Series I savings bonds. But regular folks might amass a position, while they await better money market rates.
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