As short-term interest rates soared in the past year, earning interest on cash has become a no-brainer. Yet, interest rates have been so low for so long that people tuned out and lost insight into the many types of interest-producing products. Short-term rates are currently hovering around 5%, a rate at which capital doubles in around 14.5 years. That's a pretty appealing return.
Now, people finally are getting "interested" on these investments -- this is, in fact, the investing inquiry I get the most.
Short-term interest rates key off the Federal Funds rate, which increased last week to 5% - 5.25% when the Federal Reserve Board increased rates by a quarter point. U.S. treasury debt can be purchased through TreasuryDirect.gov or most brokerage firms. One to three month Treasury bills currently yield 5.07% - 5.32%, and one-year T-Bills yield 4.77%. Interest on Treasuries is only taxed at the federal level, which especially benefits residents of high-tax states. All money markets key off these short-term treasury rates, although most own some combination of T-Bills, commercial paper, and short-term debt.
Buying Treasuries directly from the government is an option. But most investors want simplicity, similar to the ease of buying the SPDR S&P 500 exchange-traded fund (SPY) when they want to invest in the stock market.
A simple method to invest in the current short-term treasury market is to buy the SPDR Bloomberg 1-3 month T-Bill ETF (BIL) . As the name implies, this highly liquid ETF only invests in T-Bills of three months and under. BIL pays a monthly dividend -- currently around 5% -- on the first of the month and slowly appreciates throughout the month to reflect interest income accrued.
Another option is the iShares Short Treasury Bond ETF (SHV) -- currently yielding over 4.5%. The trading dynamic is similar to BIL, while this ETF invests in treasuries maturing in a year or less. SHV may fluctuate more than BIL when short-term rates rise or fall significantly in a short period of time. At this stage of the rate cycle, holders of SHV are more apt to benefit from a bond rally as short-term rates decline.
With zero commissions in most brokerage accounts to buy and sell BIL and SHV, owning these ETFs is the easiest way to gain exposure to interest-producing vehicles near the prevailing treasury rates.
Since treasury rates could decline from these lofty levels, locking in a yield by buying Treasury bills/notes for one-to-three years may be prudent as rates are likely to decrease. It's easy to ignore the lock-in option when money market yields are so high, but these rates will decline rapidly if the Fed commences a rate-cutting cycle.
The potential for a government default due to the debt ceiling debacle could lower the price of T-Bills, which will impact BIL and SHV. While a default is possible, it's the least plausible outcome. More likely is a debt ceiling deal or a temporary lifting of the cap until an agreement is reached. For the most risk-averse investors, waiting until the debt ceiling resolution would be recommended.
Those who wish to increase risk for a higher payout may consider iShares Preferred & Income Securities ETF (PFF) . PFF holds a well-diversified portfolio of primarily high-quality preferred shares, which pays a monthly dividend currently yielding over 7%. The ETF holds diverse bank preferred shares, and the banking turmoil has caused a sharp pullback in PFF. No issuer of preferred shares represents more than 3.5% of PFF's holdings, with too-big-to-fail banks as the predominant bank holdings.
Two weeks ago, Apple (AAPL) caused a stir by offering a savings account linked to its credit card. The savings account currently yields 4.15%. Keep in mind that this rate will fluctuate with the prevailing Federal Funds rate, and is now only offered to Apple Card holders. Revolving debt on Apple's card would be costly, with a variable rate between 15%-26%, so it would be counter-productive for gaining access to the savings account if card debt isn't paid off monthly.
Take action while attractive yields are available.
(AAPL is among the holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells stocks? Learn more now.)
