The current interest rate environment is weighing heavily on those who count on getting any kind of return on their cash and/or low-risk investments.
Treasury bond yields are at historic lows, especially at the short end of the curve. That means that the most cash-like treasury securities – the ones which mature the soonest and which have the least interest-rate risk – yield almost nothing. As of Feb 28, 2012, all US Treasury bonds (notes, bills) with maturities under 2 years have yields of less than 0.3%. In a world where inflation is higher than that, this means you are losing purchasing power with every dollar that’s tied up in these “secure” instruments.
If you’re willing to take on some credit risk (chance that those to whom you’ve lent your money won’t pay you back in full or in a timely manner), investment-grade (least credit risk) corporate bonds are paying more – but not a lot more. Again, as of Feb 28, 2012, 2-yr AA-rated corporate bonds are yielding approximately 0.64% and A-rated (slightly more credit risk than the AA bonds) are paying approximately 1.23%. If you can afford to take that little bit of risk, there may be a place for short-term bonds in your portfolio’s lowest-risk cash-like allocation, but there’s still ultimately no substitute for true cash-like options which maintain a steady value and have high liquidity. The traditional two things used for that are money-market mutual funds and FDIC-insured bank savings accounts.
Money-market mutual funds, which have to invest in the highest quality shortest term bonds are yielding under 0.11% (even in the ones which are waiving all or part of their expenses). In a more normal interest-rate environment, these are a great way to access market rates of interest with minimal risk. Right now, though, the payoff is quite small.
So the remaining alternative is traditional bank savings accounts. And if you walk into your local brick-and-mortar bank, the rates are likely to be about as meager as the money-market funds. However the online banks (or online accounts for some more traditional banks) are offering a much better deal.
As of Feb 28, 2012, the following banks are offering the following yields on their FDIC-insured savings accounts:
Ally Bank — 0.84%
EverBank — 0.76%
AmericanExpress — 0.75%
ING Direct (recently bought by Capital One) — 0.80%
We’ll try to update this list periodically and welcome any feedback. If you know of another good savings bank deal out there, please let us know.