(Short-Term Cash) US Treasuries vs. Brokered Bank CDs vs. Term Deposits

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Topic Author
helloyou
Posts: 222
Joined: Sun Apr 26, 2020 6:09 am

(Short-Term Cash) US Treasuries vs. Brokered Bank CDs vs. Term Deposits

Post by helloyou »

I have been trying to wrap my head around this question in the past few days as a USD and EUR holder.

I am currently unemployed and 70% of my net worth is cash. I might need up to 10-15% of this current cash allocation in the upcoming 12 months for personal and company registration purposes, and as an emergency fund. For the The rest (85-90% of my cash allocation) I would likely not need it during the next 12 months, unless the stock market crashes to buy). In other words I would likely need the 10-15% of my current cash assets available anytime, and the rest are fine in higher yield/locked in products (CDs, US treasuries etc.)

Here are the best options I have found for USD:

- Interactive Brokers: 4.2% based on my position. The only caveat is that the interest rate might decrease (or increase) abruptly without notice. It should be fine for the next 6 months based on the current rates market but it's not a guarantee by any means and it's up to IB to decide the return they provide their customers.

- HSBC Bank: 4.3% to 4.25% on Term deposits (3 to 6 months) which is not bad, but the money is locked in.

- US treasuries seem to have a yield of around 5.2% over a 6-7month period but I am not sure how this would be treated as a non US tax resident. I am reading online that it would only create a tax event in the country I am a resident of, not the US. Also, the yield calculation done by Interactive Brokers (Current Bid Yield and/or Current Ask Yield) might be both off. When buying such a product (T bill or note), is the return guaranteed at the day of purchase or is it subject to fluctuate even if I wait until the maturity/expiration date to receive the principal + interest payment?

- Brokered Regional/large US bank CDs: there are a bunch of bank CDs on IB but the bid ask spread in yield is massive, the best ones for a 6-7 month duration have a bid of 4.9-5% (less than US treasuries!) but a ask of 5.8 to 6% even for reputable and safe tier 1 banks (why is there such a huge spread?)

I also read on this forum about money market funds, but the bid ask spread could be an issue, and I am not sure it could beat HSBC or US treasuries hence I am not too sure about the pros of these products for a short term investor (1 year max).

On the EUR side, I can get 3% to 3.3% with secured saving accounts in banks which is hard to beat.

Any recommendations?
Topic Author
helloyou
Posts: 222
Joined: Sun Apr 26, 2020 6:09 am

Re: (Short-Term Cash) US Treasuries vs. Brokered Bank CDs vs. Term Deposits

Post by helloyou »

Any ideas?
daviddem
Posts: 264
Joined: Wed Jul 06, 2016 12:53 pm

Re: (Short-Term Cash) US Treasuries vs. Brokered Bank CDs vs. Term Deposits

Post by daviddem »

Your best bet imo is to purchase a money market fund that yields the Fed rate (minus expense ratio of the fund) - about 5.1% at the moment (or the ECB overnight rate for EUR). On IBKR you only pay $5.95 per purchase or redemption, no matter the size of the transaction, far cheaper than buying an ETF, and there is no bid/ask spread unlike ETFs. These are instantly redeemable should you wish to purchase stocks at any point. This is exactly what I do with my cash while waiting for a good entry point to purchase stocks (and that is also what IB is doing with the cash in your account, but they take a cut on it AND don't pay anything on the first $10k). That is also what large corporations do with their cash: they park it in money market funds, where it is available to them at short notice and produces interest in line with central bank overnight rates.

These funds invest in ultrashort bonds, commercial paper, certificates of deposits, time deposits, repurchase agreements etc so their NAV is practically insensitive to interest rate variations. Some of them invest exclusively in sovereign debt, most of them invest in private debt, mostly of bank and financial institutions, but also large non-financial corporations. They are subjected to strict regulations concerning the quality of their investments, their duration and their liquidity.

Familiarize yourself with the different types of MMFs available in Europe here:

https://www.immfa.org/about-mmfs/investor-help.html
https://www.immfa.org/about-mmfs/about-mmf.html

Fitch also provides a useful spreadsheet every couple of months to help investors compare the MMF available on the market (it's free but you need to register):

https://www.fitchratings.com/research/f ... 16-05-2023

I have compiled the list of money market funds available on Interactive Brokers in an Excel spreadsheet (on IB, go to research -> mutual funds and filter by "money market"):

https://docs.google.com/spreadsheets/d/ ... ue&sd=true

Sidenote: there are very few EUR CNAV sovereign debt funds. This is a consequence of the ECB rates being negative in recent years. The only proper CNAV EUR fund is the Blackrock one but it requires 1,000,000 EUR min investment...

Personally I don't want to restrict myself to sovereign debt, so I zeroed in on the Invesco fund for my USD, and on the Aberdeen fund for my EUR (because I didn't have EUR 150k for the Invesco one).
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