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I’ve never been in the morning. When the alarm on my trusty clock radio rings, I usually hit the snooze button and listen to the news shortly before I get out of bed to face the day. While lingering under the covers recently, I heard an ad that made me smile.
One of our local banks in the New York area was peddling a product called a bump-up certificate of deposit. These CDs typically offer savers a fixed return for a set period that can be increased once if interest rates continue to rise.
I liked what I heard, and not because I’m necessarily a superior. Consumers who choose these products can expect to sacrifice some performance early on for a chance to win more later. What I found encouraging was that someone in finance was finally competing for people’s money.
One of the unfortunate consequences of the Federal Reserve’s zero interest rate policies—imposed first after the financial crisis and then again during the pandemic—has been the impact on modest savers. They were punished, their returns reduced to dust. Watching your compound interest in a government-insured savings institution has become as quaint a memory as dialing a rotary phone.
That changed this year as the Fed began raising rates to contain inflation. Big bank customers are unlikely to benefit much as these lenders are inundated with deposits and lock in much of their customer base with automatic payment options and other conveniences. But some of their competitors are offering better deals.
Yields on money market mutual funds topped 2% this week for the first time since July 2019, said Peter Crane, chief executive of Crane datawho added that returns of around 5% were the norm in the decade before the financial crisis.
Bankrate.com shows US banks with savings accounts promising annual percentage returns of 2% or more. Marcus, The consumer arm of Goldman Sachs offers a one-year CD with an APY of 2.7% and a 20-month CD at 2.5%, according to the website.
“Yields have really increased quite substantially this year,” says Greg McBride, chief financial analyst at Bankrate.com. “At the start of the year, the highest-earning bank savings accounts were just over half a percent.”
Considered a conventional investment, cash is reminiscent of the old Woody Allen joke: Sex without love is an empty experience, but as empty experiences go, it’s one of the best.
With US inflation hovering north of 8%, accepting a return of 2% or thereabouts is obviously not a good idea. But it wasn’t the worst idea this year either. Cash outperformed stocks, bonds, bitcoin, dogecoin, copper, lumber – a number of assets outside of that Mickey coat baseball card that just brought in $12.6 million.
Smart money reacted. A Goldman Sachs analysis of mutual funds holding $2.7 billion in equity assets found that they “have increased their allocation to cash this year at the fastest rate” since the financial crisis. In the first half of the year, liquidity rose from 1.5% of portfolios to 2.4%, or $208 billion, he said.
Bob Haber, chief investment officer of Boston-based Proficio Capital Partners, a “safety-first” manager that manages $3 billion for 25 families, went even further. With a strategy focused on equities, high-quality bonds, precious metals and cash, he says he has invested about 30% of his portfolio this year in cash and “near-cash” instruments such as treasury bills. in the shorter term. “This year, everything but silver entered a bear market and continues to be in a bear market,” he adds.
That said, for individual investors, cash often plays a different role than other assets. Their money is money for rainy days or, as McBride puts it, “the buffer between you and 18% credit card get into debt thanks to an unforeseen expense”.
Many of us have such worries – and for some they are more pressing. Tens of millions of people in the United States struggle to maintain a sufficient financial cushion. A Bankrate.com poll in June found that 23% of Americans had no emergency savings, while 28% had savings, but not enough to cover three months of expenses.
As painful as the Fed’s rate hikes are for the U.S. economy, they also promise to provide some yield and perhaps modicum of comfort for an oft-forgotten group of savers – the worried, the beleaguered, the people who just want to put their head on the pillow and get some sleep at night.
gary.silverman@ft.com
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