It looks like we are going to get one of those "Sit around and wait for the FOMC" days. While we await the likely "Nothin’ Done" verdict, it may be a good time to revisit an overlooked asset class:
Currently, you can get near 5% (risk free principle) for cash. For many investors, that is an attractive alternative to risk in equities and long term commitments of bonds.
Note that these rates are not fixed, and may very well be appreciably lower in the event the Fed begins cutting (Best guess, later 2H, most likely). The primary risk of cash is missing the opportunity to lock in a higher rate if that happens. The flipside is CD rates will also go higher if the Fed tightens further.
Today’s Journal has an article about the very subject: Interest-Rate Outlook Adds Luster to Cash. Here’s a quick excerpt:
"Cash is regaining some of its sparkle. With the Federal Reserve widely expected to leave short-term rates unchanged today — and well into the future — many financial planners are recommending that clients put their extra money into short-term securities and high-yielding savings accounts to boost their returns.
That’s a shift from last fall, when money managers were moving into longer-term investments to lock in still-favorable yields. Banks, too, are beginning to change course. After trimming yields on cash accounts last fall, some banks are bumping up rates again to lure new deposits.
Earlier this week, for example, HSBC Holdings PLC’s online bank unit, HSBC Direct, boosted the promotional rate on its online savings account to 6% on new deposits until the end of April, from 5.05%.
Another advantage of moving to more-liquid investments: Doing so can give you the flexibility to quickly move into higher-yielding securities if and when interest rates start to move higher.
A raft of stronger-than-expected economic data and shifting rate expectations are spurring the move toward cash. Oil and gas prices have retreated, easing concerns over a slowdown in consumer spending. Sales of new homes increased in December for a second consecutive month, raising hopes that the worst of the housing downturn could be coming to an end. Meanwhile, the unemployment rate is still relatively low, and the manufacturing sector is proving to be healthier than expected."
Interest-Rate Outlook Adds Luster to Cash
With Fed Expected to Sit Tight, Financial Planners Steer
Clients to Short-Term CDs, High-Yield Savings Accounts
JANE J. KIM
WSJ, January 31, 2007; Page D1
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