Cash Yields Are King...For Now

Cash Is King, but for How Long?

You’ve heard the old saying “Cash is king.” Well, to the extent that’s true today, it’s been a rags-to-riches story.

Thanks to the cycle of interest-rate hikes the Federal Reserve started in 2022, cash yields have gotten an enormous boost. A year ago, it yielded all of 0.01% (meaning it was producing $1 of income per year on a $10,000 account). Now cash has ascended from serf status to produce a far more lavish yield of 4.23% this month.

Cash yields rising
Note: Chart shows the SEC yield for the Fidelity Government Cash Reserves money market fund on a weekly basis from 2/1/22 through 3/3/23. Source: Bloomberg.

That said, there’s no guarantee cash will still be king in a year’s time. That 4.23% yield is a big improvement compared to where we’ve been, but make no mistake—cash yields can move down just as rapidly as they rise. The chart below shows how transitory the interest rate on cash can be over time.

How long will cash yields remain high?
Note: Chart shows the SEC yield for the Fidelity Government Cash Reserves money market fund on a weekly basis from 2/1/00 through 3/3/23. Source: Bloomberg.

Cash serves a vital purpose for investors and savers. Our baseline advice for clients is to maintain an emergency cash fund that can cover six months of expenses. Money market funds and savings accounts are also viable short-term parking spots for larger sums of cash earmarked for a substantial purchase, like a down payment on a house or car. 

But now that cash’s yield has become more competitive with short-term bond yields and stock dividend yields, some investors are understandably tempted to hold more of it than they have in the past. While it’s helpful to be earning extra interest on your emergency fund, we view that as an added benefit, not the goal of that account.

Talk to your wealth adviser if you have questions about how much cash you need and what kinds of alternatives make sense in the context of your financial plan. They will be able to provide answers and work with you on any adjustments to your strategy.

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