Wall Street Journal
OPTIONS FOR SAVERS
JUNE 3, 2011
In Stashing Cash, Look Ahead by Karen Damato
When interest rates eventually rise, today's low-risk alternatives won't all fare the same
The returns on low-risk savings these days range from just about zilch to a little more than nothing.
With interest rates at rock bottom, money-market funds, bank accounts and ultrashort-debt funds have been cranking out
uniformly terrible returns. But investors should remember a crucial fact: Rates won't stay low forever. And when they rise,
low-risk vehicles may turn in very different results, since they have very different structures and investment philosophies.
In looking at the various options, investors "should think about how they will perform with certain interest-rate changes,"
says Allan Roth, a financial adviser in Colorado Springs, Colo.
Many economists believe in the first half of next year the Fed will start raising short-term interest rates from its current
target range of 0% to 0.25%. And when the Fed does start raising rates, that might mean "hikes as far as the eye can see,"
, president of Crane Data LLC, which tracks money funds. Between June 2004 and June 2006, the Fed's
rate-setting committee boosted its target rate at 17 consecutive meetings.
Here's a look at four low-risk alternatives for savings and how they could be affected by the next increase in rates.
There's nothing good to be said about the current yields on money-market funds, which are mutual funds that buy very
short-term and high-rated debt. Among taxable money funds for individual investors, the average yield is just 0.01% a year,
according to researcher iMoneyNet—only $1 a year on a $10,000 investment. The highest yielding of these funds is at just
0.11%, while the highest yield among tax-free money funds is 0.16%, a reflection of concerns about the finances of some
states and municipalities.
Money funds aim to keep their share price at a steady $1. But as recent history has proved, that isn't a guarantee: In 2008,