Rising interest rates and stock market volatility over the past year have added extra appeal to high-yield savings accounts and certificates of deposit offered by banks.
Then came the stunning failure of Silicon Valley Bank, the closing of Signature Bank and the series of regional banks under pressure, all in a matter of days.
Depositors at the two failed banks have access to all their money, not just funds below the Federal Deposit Insurance Corporation’s $250,000 coverage limit. The Federal Reserve is also establishing a way for cash-strapped banks to use cash. Statements from the “bridge banks” created in the FDIC liquidation process said they are open and operating.
Flagstar Bank, a subsidiary of New York Community Bankcorp Inc., agreed Sunday to assume most of Signature Bank’s deposits and some of its loans.
In Europe, Credit Suisse CS,
shares fell as much as 65% on Monday after the struggling Swiss bank agreed to be acquired by rival UBS UBS.
with a strong discount. The Swiss government wrote down the value of so-called AT1 bonds to zero. These bonds, also called contingent convertible bonds or CoCos, have been a key source of funding for European banks.
But restless investors looking for safety and a little yield don’t need to crack the playbook on where they park cash, financial advisers say. The same pros and cons that applied to CDs, high-yield savings accounts, money market funds and Treasuries still apply after the drama of the bank failure.
“Hasty action causes more pain,” said Eric Amzalag of Peak Financial Planning in Woodland Hills, California. “It’s good to be decisive, but it’s a fine line between being decisive and being impulsive.”
Amzalag has advised clients to be “extremely defensive,” a portfolio stance it has advised since late 2021. That’s excessive exposure to cash and Treasury debt, it said.
Analysts at LPLResearch.com wrote last week: “At this point, we do not believe the SVB and SBNY bank failures are a deeper sign of things to come. However, we are paying close attention to ongoing developments in the banking sector and in other industries for signs of any widespread contagion.
“For long-term strategic investors, we believe there is no need to make changes to well-balanced allocations,” said the authors of the site, which is a research blog of LPL Financial.
But Satyajit Das, a former banker and author of “A Banquet of Consequences – Reloaded,” wrote in MarketWatch on Monday: “The problems in the banking system may not be over. The collapse of Silicon Valley Bank highlighted the interest rate risk from the purchase of long-term securities financed by short-term deposits and the susceptibility to a liquidity crunch.”
The Dow Jones Industrial Average DJIA,
the S&P 500 SPX,
and the Nasdaq Composite COMP,
they were all treading water on Monday.
But financial advisors advise taking a deep breath.
They say portfolios should have some exposure to cash and cash equivalents, including CDs, money market funds and short-term Treasuries. But overdoing it could risk losing long-term gains, depending on a person’s goals and when they need the money, they add.
Here’s what to consider:
CDs and savings accounts
Money in savings accounts, checking accounts and CDs are insured by the FDIC up to $250,000. Money market deposit accounts are also insured by the FDIC. They are similar to savings accounts and different from money market mutual funds.
“The standard amount of insurance is $250,000 per depositor, per insured bank, for each category of account ownership,” the FDIC explains on its website. In a joint account owned by two or more people, each joint owner gets their own $250,000 of coverage.
There are “alternative solutions” to get even more deposit coverage, including opening multiple accounts, said Erik Baskin of Baskin Financial Planning.
“I don’t think CDs and high-yield savings accounts are any less attractive,” Baskin said.
The APR for a one-year CD from an online bank is now 4.5%, and the APY for a high-yield savings account is now 3.5%, according to DepositAccounts .how.
“We just got a stark reminder that FDIC insurance limits are important, so managing cash properly to maximize yield, minimize cash drag, and maintain FDIC insurance is as important as ever,” he said.
In the big picture, hedging limits are a concern for a minority of investors, said James Cox, managing partner at Harris Financial Group. “For the vast majority of investors, a CD is great, because most people don’t have enough money to exceed the FDIC limits at a bank,” he said.
The downside of CDs is the lock-in period and early withdrawal penalties for depositors who take out cash before maturity.
“CDs don’t look very attractive at the moment, in my opinion. I think the flexibility and optionality will be worth it at this point,” Amzalag said. In other words, he’s not worried about people losing their money on CDs, he just doesn’t think the trade-off for slightly higher returns is worth the cost less choice of where to put the money to work.
Money market funds and Treasury bills
Think of cash investments as a variety of ways to earn some yield and maintain quick access to money with very little risk. There is the APY of savings accounts and CDs.
There are also rates on Treasury bills, which are short-term US government debt with maturities of up to 52 weeks. The rate range has been comfortably above 4.5% throughout the year.
Treasury debt is not covered by the FDIC; instead, repayment promises have the full faith and credit of the federal government.
Interest income on Treasury bills is subject to federal income tax, but is exempt from state and local income tax. Treasury bills can be purchased through brokers and TreasuryDirect.gov.
Money market funds are investment funds comprised of short-term US government debt, municipal and rapidly maturing corporate debt. On the conservative end of the risk spectrum, investors typically get their money from these funds in trade settlements that occur the same day the trade is executed, according to Charles Schwab Corp. SCHW,
They are regulated by the Securities and Exchange Commission and are subject to rules regarding the duration and quality of the underlying investments. The seven-day annualized return for the largest money market funds is now 4.41%, according to Crane Data, which tracks the money market fund industry.
In a look at potential “spinners” beyond the banking sector, Fitch Ratings discussed money market funds. All potential impacts “were not yet material from a rating perspective,” the analysts stressed.
The money market funds that Fitch rated had no direct exposure to failed banks, he said. But these funds “could be a particular area of rating sensitivity and systemic risk if investor risk aversion leads to high redemptions of money market funds or if deposit outflows spread to higher-rated banks” that they are part of money market portfolios.
These funds could also see an influx of money, “due to the withdrawal of deposits from affected banks,” Fitch Ratings said.
For Cox, personally, Treasury bills have stood out over the past six months. Pouring money into Treasuries may not be as easy as a savings account, he said. But the tax treatment of Treasury bonds and the backing of the US government make it the standout, along with “a very respectable interest rate.”
It felt that way before the explosion of Silicon Valley Bank and Signature Bank, and it feels that way after. “It’s an easy choice right now. It won’t always be like that. But right now, it’s clearly the winner,” he said.
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