Rising interest rates and stock-market volatility over the past year have added extra allure to the high-yield savings accounts and certificates of deposit that banks offer.
Then came the stunning failure of Silicon Valley Bank, the closure of Signature Bank and the array of regional banks under pressure — all in a matter of days.
Depositors at the two failed banks are getting access to all their money, not just the funds below the Federal Deposit Insurance Corporation’s $250,000 coverage limit. The Federal Reserve is also establishing a way for banks with any liquidity issues to tap cash. Statements from the “bridge banks” created in the FDIC receivership process said they are open and working.
Flagstar Bank, a subsidiary of New York Community Bankcorp Inc., on Sunday agreed to assume most of Signature Bank’s deposits and some of its loans.
In Europe, Credit Suisse
shares dropped as much as 65% on Monday after the struggling Swiss bank agreed to be taken over by its rival UBS
at a steep discount. The Swiss government wrote down the value of what are called AT1 bonds to zero. These bonds, also called contingent convertible bonds or CoCos, have been a key funding source for European banks.
But jittery investors in search of safety and some yield don’t need to rip up 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 Treasury debt still apply after the bank-failure drama.
“Rushed action leads to more pain,” said Eric Amzalag of Peak Financial Planning of Woodland Hills, Calif. “It is 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 posture he’s advised since late 2021. That’s an overweight exposure to cash and Treasury debt, he said.
Analysts at LPLResearch.com wrote last week: “At this time, 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 hints of any widespread contagion.
“For longer-term, strategic investors, we believe no changes to well-balanced allocations need to be made,” said the authors at the site, which is an LPL Financial research blog.
But Satyajit Das, a former banker and author of “A Banquet of Consequences — Reloaded,” wrote on MarketWatch on Monday: “The banking system’s problems may not be over. The collapse of Silicon Valley Bank highlighted the interest-rate risk of purchasing long-term securities financed with short-term deposits and the susceptibility to a liquidity run.”
The Dow Jones Industrial Average
the S&P 500
and the Nasdaq Composite
were all treading water Monday.
But financial advisers 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 Treasury debt. But overdoing that could risk missing long-term gains, depending on the person’s goals and when they need money, they add.
Here’s what to consider:
CDs and savings accounts
The money in savings accounts, checking accounts and CDs are FDIC insured up to $250,000. Money-market deposit accounts are also FDIC insured. These are akin to savings accounts, and different from money-market mutual funds.
“The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category,” the FDIC explains on its website. In a joint account owned by two or more people, each co-owner gets their own $250,000 coverage.
There are “workarounds” to gain even more deposit coverage, including the opening of multiple accounts, said Erik Baskin of Baskin Financial Planning.
“I don’t think CDs and high-yield savings accounts are any less appealing,” Baskin said.
The annual percentage yield on 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.com.
“We have just gotten a harsh reminder that FDIC insurance limits matter, 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, the coverage limits are a concern for a minority of investors, said James Cox, managing partner for Harris Financial Group. “For the overwhelming majority of investors, a CD is great, because most people don’t have enough money to exceed the FDIC limits at one bank,” he said.
The downside for CDs is the lock-up period and early withdrawal penalties for depositors who take cash before maturity.
“CDs don’t seem very attractive at this point, in my opinion. I believe flexibility and optionality will be worth a premium at this time,” said Amzalag. In other words, he doesn’t have concerns about people losing their money in CDs, he just doesn’t think the tradeoff of slightly higher yields are worth the cost of less choice in where to put money to work.
Money-market funds and Treasury bills
Think about cash investments as a variety of ways to rake in some return and retain quick access to money at a very low risk. There’s the APY from savings accounts and CDs.
There’s also the rates on Treasury bills, which is short-term U.S. government debt with maturities up to 52 weeks. The rate range has hovered easily above 4.5% throughout the year.
Treasury debt doesn’t have FDIC coverage — instead, repayment promises have the full faith and credit of the federal government.
The interest income from Treasury bills are subject to federal income tax, but exempted from state and local incomes taxes. Treasury bills can be purchased through brokerages and TreasuryDirect.gov.
Money-market funds are mutual funds comprised of short-term U.S. government debt, municipal and corporate debt that quickly matures. At the conservative end of the risk spectrum, investors can usually get their money from these funds in trade settlements that happen the same day the trade is executed, according to Charles Schwab Corp.
They are regulated by the Securities and Exchange Commission and subject to rules on the duration and quality of the underlying investments. The annualized seven-day yield on the largest money-market funds is now 4.41%, according to Crane Data, which tracks the money-market fund industry.
In a look at possible “knock-on effects” beyond the banking sector, Fitch Ratings discussed money-market funds. All the potential impacts were “not yet material from a rating perspective,” analysts emphasized.
The money-market funds that Fitch rated had no direct exposure to the failed banks, it said. But these funds “could be a particular area of rating sensitivity and systemic risk if investor risk aversion leads to elevated money-market fund redemptions or if deposit outflows extend to more highly rated banks” that are part of money market portfolios.
These funds could also could see money coming in, “on the back of deposits being withdrawn from affected banks,” Fitch Ratings said.
For Cox, personally, Treasury bills have distinguished themselves during the past six months. Pouring money into Treasury bills may not be as easy as a savings account, he said. But Treasury bills’ tax treatment and U.S. government backing make it the standout — along with “a very respectable interest rate.”
He felt that way before the Silicon Valley Bank and Signature Bank blowups, and he feels that way afterwards. “It’s an easy choice right now. It won’t always be that way. But right now, it’s clearly the winner,” he said.
Read:Amid bank failures, savers look to stretch federal deposit cash protection beyond $250,000