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Jittery Investors Turn to Cash in Hunt for Yield - WSJ

edited January 2023 in Other Investing
”The dash for cash on Wall Street is back on. Investors have added about $135 billion to global money-market funds over the past four weeks … through Jan. 18. That is the best stretch since the four-week period ended May 2020, when those funds logged roughly $175 billion in net inflows …

“Increased cash allocations are the latest sign of caution among investors who are questioning whether the recent rebound in stocks and bonds will continue … The average return on U.S. money-market funds this month is 4.12%, the highest yield since the 2008 financial crisis … The S&P 500, on the other hand, has a dividend yield of about 1.6%.”


By the end of December, assets sitting in money-market funds hit a record $5.18 trillion … That surpassed the previous high of $5.16 trillion from May 2020 … In December, individual investors slightly lowered the share of cash in their portfolios to about 21.8%, below the historical average of roughly 22.5% … The reading still marks one of the highest levels since May 2020. In comparison, stock and stock fund allocations are at about 63.9%, above the historical average of around 61.5%.

Excerpted from: The Wall Street Journal (Print Edition) January 26, 2023 (Narrative edited for brevity. Attribution to data sources omitted for brevity).

You’ll likely need a WSJ subscription to access story online.

Comments

  • edited January 2023
    With little more effort, one can also buy T-Bills to beat the m-mkt funds.

    I also read a story that banks are losing deposits because bank accounts (savings, online savings, m-mkt accounts) haven't kept up with rising rates. But banks don't care as their lending business has been slow too and the Fed pays them 4.4% to park their reserves at the Fed.

    Edit/Add: LINK1 LINK2
  • edited January 2023
    Capital One Bank is paying 3.3% for their Savings Account, and 4.15% for one year CDs. That is still below the 4.27% and 4.42% for a Money Market fund at Schwab. and I can get one year CDs at Schwab for a 4.75% Coupon rate. Capital One offers some liquidity advantages for me, with a local branch that appeals to my wife, and CD penalities for early termination is much less "painful" than brokerage CDs at Schwab. You take a hit on interest rate amounts at Capital One, but not as significant as some might expect.
  • FWIW, I have Capital One a/c. But what I don't like is that it keeps coming up with new a/c with higher yields ("360 Performance Saving" is the latest) and leaves legacy savings at low levels (they exist but not even shown on the website). The next may be "360 Super Performance Saving".

    The legacy savings owners are not informed about the newer options. This has been in the news for Capital One and other banks. A while back, I called Capital One to complain, and the Rep suggested to just open a new 360 Performance Savings and transfer money - that is what I did. As the Bank is linked default for some transfers I make, I keep a variable amount depending on the current deals.
  • edited January 2023
    What do the smart kids here, if at Fido, do with their MM holding? I am in FDRXX, which is just under 4% (hope I am reading this right), and see options of SPAXX and some bank sweep. Thoughts?
  • At Fido, I have both m-mkt fund (SPAXX core/settlement) and T-Bills. Yesterday's T-Bills Auction was 13-wk 4.714%, 26-wk 4.860%; These are auctioned weekly.
  • At Fidelity I also use SPAXX as a core/settlement fund in my regular (taxable) account and FDRXX in my Roth. In addition I also hold FZDXX in my Roth and just transfer funds as the want or need arises.
  • tnx, but what are the reasons/advantages/disadvantages of each (if any)? Why use SPAXX ever?
  • edited January 2023
    Fido Brokerage has a core/settlement a/c that can be:

    Taxable a/c: SPAXX (Gov M-mkt), FZFXX (Treasury M-mkt), FCASH (brokerage cash)

    Tax-Deferred: SPAXX, FDIC banks

    SPAXX is default that can be changed.

    Fido is also unique in that for purchases, it will tap, sequentially, all Fido m-mkt a/c, core/settlement first, then other Fido m-mkt funds.

    https://www.fidelity.com/trading/faqs-about-account

    Vanguard won't do that. It will tap ONLY the core/settlement VMFXX (Gov M-mkt). Money must be transferred timely into VMFXX to settle trades.

    Schwab doesn't offer ANY m-mkt funds as core/settlement. Money must be transferred timely into brokerage cash to settle trades.
  • Thank you for all your inputs. I will reassess my money market funds. What a change from a year ago when they yielded very little.
  • edited January 2023
    Hi @davidrmoran
    What do the smart kids here, if at Fido, do with their MM holding? I am in FDRXX, which is just under 4% (hope I am reading this right), and see options of SPAXX and some bank sweep. Thoughts?
    No suggestion of 'smart', but some info.

    Today's (1-31-2023) yield rates are:
    FZDXX = 4.29%
    FDRXX =3.99%
    SPAXX = 3.96%

    With the above, at April, 2022; FDRXX and SPAXX had yields of about .1%, FZDXX was about .22%. Through 2022, FZDXX yield moved higher, too, but at a much quicker rate. In December, this rate flattened, while the other two continued to play catch up and continue to rise now.

    As you are aware, when logged in to your Fido acct., you may select positions, which will list all accts. Then select 'Dividend View'. This will provide the list of holdings with a 'yield column' which provides the 'yield' for all investments. EX: one of our current holdings for the healthcare etf, FHLC indicates a yield of 1.33%; as well as all other holdings including the MMKT's.

    As @Mark wrote, the 2 MMKT's are cash core accounts for in/out monies parking when not invested in funds. These two are common with either a taxable, T-IRA or Roth accts.
    FZDXX is a MMKT fund, but must be purchased as any other fund.
    In 2022 FZDXX was the first to have a rapid rise in yield.
  • Anybody know off the top of your head what % of the Government funds ae state tax exempt?

    SPAXX is 75% Repos. I am looking for the statement from Fidelity about this but it is hard to find
  • edited February 2023
    Fido Tax tab shows info only for muni funds now.

    Info on % US Gov Obligations is pending - says early-Feb. This is the portion exempt from state/local taxes.
  • edited February 2023
    Feds raised interest rates today by .25%--I wonder if that will lead to another hike in MM and CD interest rates soon. In the fixed income options, I continue using MM and short term CDs, and whatever cash I hold is only temporary and in small amounts.
  • I got data from 2021 from Fido. about 50% of the SPAXX yield was state tax free. I don't know what % then was in Repos, but I bet that it was 50% and Repos are not state tax free
  • edited February 2023
    Would one expect higher yield in T bills too at auction?
  • edited February 2023
    ALL Treasury yields FELL today & Powell raised fed funds rate. Go figure.
    Date 1 Mo, 2 Mo, 3 Mo, 4 Mo, 6 Mo, 1 Yr, 2 Yr, 3 Yr, 5 Yr, 7 Yr, 10 Yr, 20 Yr, 30 Yr
    01/31/2023 4.58, 4.64, 4.70, 4.74, 4.80, 4.68, 4.21, 3.90, 3.63, 3.59, 3.52, 3.78, 3.65
    02/01/2023 4.59, 4.63, 4.66, 4.77, 4.79, 4.66, 4.09, 3.75, 3.48, 3.43, 3.39, 3.67, 3.55
    https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2023
  • Thank you @yogibearbull
    So, if one perhaps is doing the Treasury (bill, note) thing or CD's at the brokerages; an assumption would be decent yields if 1 year of less, yes? On the other hand, with the longer duration; one should be having benefit of profit from pricing. At least that is the case for today after 2:30pm.
    We'll discover soon enough how long is the 'happy hour' period.
  • edited February 2023
    I am struck by the contrarian nature of the WSJ article in light of the market activity in both equities and bonds. Not just since their lows in the Oct./Nov. period but even more so YTD. There are bond funds out there that unbelievably haven’t had a down day in 2023. I suspect we will now see a lot of that cash coming back into the markets.
  • sma3 said:

    I got data from 2021 from Fido. about 50% of the SPAXX yield was state tax free. I don't know what % then was in Repos, but I bet that it was 50% and Repos are not state tax free

    https://www.fidelity.com/tax-information/prior-year-tax-exempt-income-information
    https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/taxes/2021-gse-letter.pdf

    Aside from repos, other holdings that one finds in government MMFs that are not state tax-exempt include debt of some agencies: FHLMC, FNMA, GNMA.
    https://www.rbcwm-usa.com/resources/file-687493.pdf

    Also, the percentage of income derived from an asset class ≠ the asset class' percentage of portfolio
    This is because different securities have different yields.

    Three states, California, New York, and Connecticut require the percentage of state tax-exempt assets (not income) in each quarter to be at least 50%, or none of the income is exempt.
    https://personal.vanguard.com/pdf/USGOIN_01_2022.pdf (see footnote ** on p. 2)

    The difference between percentage of income and percentage of assets may explain why in 2020, 57% of the income from FDRXX was state tax-exempt, but still the fund failed to meet the 50% asset threshold.
    https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/taxes/2020-gse-letter-sai-funds.pdf

    Regarding FCASH, this is covered by SIPC insurance, so long as the cash is temporary - there awaiting investment (cf. Robinhood). The MMFs are securities, not cash.

    A side note on cash-ish yield: FWIW, we're a month into 2023 and RPHIX is still chugging along ahead of Treasuries and MMFs. Its January total return is 0.47%, or 5.79% annualized.
    https://mutualfundobserver.com/discuss/discussion/60495/riverpark-short-term-high-yield-divs-and-availability#latest
  • edited February 2023
    Rates continue to fall this AM post-FOMC rate hike. https://www.cnbc.com/bonds/

    There are also speculations on Twitter that Powell didn't seem to fully recover from his recent Covid infection - although it was noted that the FOMC Statement removed Covid as an economic risk. Powell started the presser hawkish but ended as dovish.
  • @yogibearbull
    Powell started the presser hawkish but ended as dovish
    My impression, too. This points to the equity/bond market 'pop' at about 2:30pm, being the reaction to his answers to the questions.
  • Thanks @yogibb for the update - quite a reversal on treasury yield on both long and short durations. Perhaps this reflects the inflation has finally slowed and the terminal 5% rate is very near. Additionally, CD yields have been treading downward since January.
  • Junkster said:

    I am struck by the contrarian nature of the WSJ article in light of the market activity in both equities and bonds. Not just since their lows in the Oct./Nov. period but even more so YTD. There are bond funds out there that unbelievably haven’t had a down day in 2023. I suspect we will now see a lot of that cash coming back into the markets.

    I enjoy reading your comments. OS
  • @msf

    Thanks for all the detail. Treasury Bills are clearly the most tax efficient for state taxes, but not quite as liquid as MMF, although it is close especially for Schwab accounts that do not have sweep features

    I found an ancient document on The MA taxing authority website that says for example Tennessee Valley Authority and Federal Farm credit Bank bonds are tax exempt, but GMNA is not

    Rather bizarre
  • edited February 2023
    From Publication IRS 550, https://www.irs.gov/pub/irs-pdf/p550.pdf

    Pg 11, "Tax-Exempt Interest
    Interest on a bond used to finance government
    operations generally is not taxable if the bond is
    issued by a state, the District of Columbia, a
    U.S. possession, or any of their political subdivisions. Political subdivisions include:
    • Port authorities,
    • Toll road commissions,
    • Utility services authorities,
    • Community redevelopment agencies, and
    • Qualified volunteer fire departments (for
    certain obligations issued after 1980).
    There are other requirements for tax-exempt
    bonds. Contact the issuing state or local government agency or see sections 103 and 141
    through 150 of the Internal Revenue Code and
    the related regulations.

    Obligations that are not bonds. Interest on a state or local government
    obligation may be tax exempt even if
    the obligation is not a bond. For example, interest on a debt evidenced only by an ordinary
    written agreement of purchase and sale may be
    tax exempt. Also, interest paid by an insurer on
    default by the state or political subdivision may
    be tax exempt."

    YBB: States can limit deductibility of interest from FUNDS by requiring min % in US Gov or muni. This doesn't apply to directly held bonds.

    Bonds guaranteed by the US Gov are TAXABLE - because those aren't direct US obligations. FNMA, GNMA, etc are in this category.

    Pg 11-12, "Taxable Interest
    Interest on some state or local obligations is
    taxable.

    Federally guaranteed bonds. Interest on federally guaranteed state or local obligations issued after 1983 generally is taxable. This rule
    does not apply to interest on obligations guaranteed by the following U.S. government agencies.
    • Bonneville Power Authority (if the guarantee was under the Northwest Power Act as
    in effect on July 18, 1984).
    • Department of Veterans Affairs.
    • Federal home loan banks. (The guarantee
    must be made after July 30, 2008, in connection with the original bond issue during
    the period beginning on July 30, 2008, and
    ending on December 31, 2010 (or a renewal or extension of a guarantee so
    made) and the bank must meet safety and
    soundness requirements.)
    • Federal Home Loan Mortgage Corporation.
    • Federal Housing Administration.
    • Federal National Mortgage Association.
    • Government National Mortgage Corporation.
    • Resolution Funding Corporation.
    • Student Loan Marketing Association"
  • Hi @yogibearbull
    You noted previous in this thread regarding Capital One CD offers. I was contacted by an in-law today about the Capital One, 5% APY, 11 month CD, "360 Performance Saving", on line offer. Is there anything, hidden in the fine print, for a new customer as to having to maintain an account, if they choose to take the monies from the CD after it matures? I ask, as I've seen offers requiring to maintain an account with bill pay and such.

    You mentioned: FWIW, I have Capital One a/c. But what I don't like is that it keeps coming up with new a/c with higher yields ("360 Performance Saving" is the latest) and leaves legacy savings at low levels (they exist but not even shown on the website).

    Thank you,
    Catch
  • @catch22, 360 CD deal looks OK to me (5% for 11-mo CD) - as can you see from the rate schedule, it is a promotional offer as the rate for 11-mo sticks out. I also looked at "Read Disclosures" at the bottom, and didn't see any catch. It may be hoping that once people open an account, they will keep it open. BTW, 5% for 12-mo CD is common and for those, it has 4.15%.

    I only have 360 Performance Savings that is offering 3.40% (low; the best national rate is much higher). This a/c is linked for some bank transfers I do, so I keep just enough for that purpose.

    My irritation has been that its promos are geared towards new a/c.

    https://www.capitalone.com/bank/cds/online-cds/
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