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Commentary

Don't Get Cute With Cash

Low rates can make cash look unattractive, but for money needed in the short term, there are few practical alternatives.

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Nearly a year ago, I looked at how very low rates were creating a huge dilemma for investors with short-term cash needs. There was just nowhere to safely stash that cash, and investors were being tempted into potentially inappropriate risky assets. Twelve months later and almost nothing has changed. Buying a 10-year Treasury bond gives you a 2.03% yield, while a six-month T-bill will provide you with a staggeringly low 0.13% yield. Cash sitting in savings and money market accounts are earning nothing. These incredibly low returns might be frustrating, but investors should be very cautious in chasing short-term yield. The short-term gain could be a Pyrrhic victory.

To the Federal Reserve, very low rates are a feature, not a bug, of its monetary policy. The central bank has done almost everything in its power to drag down both near-term and long-term rates, and this isn't in and of itself a bad thing. Low rates have been instrumental in cradling the economic recovery. Cheap mortgages, the ability for households and businesses to refinance expensive debt and the availability of cheap credit for the creditworthy has helped support the economy and rebuild broken balance sheets.

Bearemy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.