Real opportunities to earn fatter returns in cash assets have finally appeared, after one of the longest yield droughts in memory. Sorry, Virginia, you won’t find them in your local bank or credit union. They don’t need all the cash they have on hand, so they are still very unlikely to pay you anything. The highest rates we have seen for savings accounts are 0.5%-0.71% in the online banks.
Money market mutual funds are even worse, with the very highest yield we have seen at 0.30% (at Vanguard).
Instead, ultra-safe Treasury Bills and short term municipal bonds are where the action is.
For example, as of this writing, the three-month T-bill is yielding 0.8%. The six month bill currently pays 1.25%, while the nine month bill is at 1.6% and the one year bill rate is a whopping 2.1%. Keep in mind that these are backed by the full faith and credit of the U.S. Government, so they are considered the most secure investment in the world. In addition, interest paid on government debt is not subject to state income taxes.
But wait, there’s more! Right now, municipal bonds are an even better deal for many investors in higher tax brackets. As an example, a one-year municipal bond with the highest AAA credit rating is paying 1.8% as of this writing. You may note that is about 0.30% lower than the comparable T-bill, but magic of municipal bonds is most are exempt from federal income tax and most in-state muni bonds are exempt from the issuing state’s income tax as well. So, for folks in a maximum federal and state tax bracket of 54%, that 1.8% rate is equivalent to a 3.9% fully taxable rate. Even a married couple who earns between $81-$170,000 in taxable income each year could get a tax-equivalent yield of 2.46% on those munis, a rate that is meaningfully above the comparable T-bill rate.
With inflation running hotter than it has in many decades, it is vital not to let your money just sit, gather dust, and lose purchasing power in your local bank. How can you get these higher rates for your own money? Give us a call and we can buy these bills and bonds for you in your Schwab accounts!