Seeking yield

[daave]

I’m trying to find the highest-yielding place to safely park around $500k for 1-3 years. WA state resident, 37% federal tax bracket.

The contenders:

VMFXX - Vanguard Federal Money Market, with an SEC yield of 5.03%

VMSXX - Vanguard Municipal Money Market Fund, SEC yield 2.81%, Taxable-equivalent yield 4.46%

Ally Money Market - 4.15%, convenient because I bank at Ally.

PenFed 1yr CD (already a member) - 4.65%

Merchants Bank of Indiana 1yr CD (highest APY I could find online, never heard of them before) - 5.65% [edit: avoid this, it’s a variable-rate CD]

Purchase individual 1-yr T-Bills - 5.2%

Brokered individual municipal bonds - it depends, but there are some competitive yields available


What would you do? Any good options I’m not mentioning?

Funds are proceeds from a house sale, have a 2 year lease now and may or may not be looking to use the funds to buy another home in the 18-36 month timeframe.

[000]

You're not considering short term TIPS (e.g. a fund like VTIP, duration a bit longer though) given that this is for a house.

If one is confident that the money won't be needed for a year (or whatever), then an MM carries the risk of yields dropping. Of course there is another side to that coin.

[Valuethinker]

I’m trying to find the highest-yielding place to safely park around $500k for 1-3 years. WA state resident, 37% federal tax bracket.

The contenders:

VMFXX - Vanguard Federal Money Market, with an SEC yield of 5.03%

VMSXX - Vanguard Municipal Money Market Fund, SEC yield 2.81%, Taxable-equivalent yield 4.46%

Ally Money Market - 4.15%, convenient because I bank at Ally.

PenFed 1yr CD (already a member) - 4.65%

Merchants Bank of Indiana 1yr CD (highest APY I could find online, never heard of them before) - 5.65%

Purchase individual 1-yr T-Bills - 5.2%

Brokered individual municipal bonds - it depends, but there are some competitive yields available


What would you do? Any good options I’m not mentioning?

Funds are proceeds from a house sale, have a 2 year lease now and may or may not be looking to use the funds to buy another home in the 18-36 month timeframe.

All of these would work.

Note T Bill yields have soared due to possibility of US debt default. That would hit your Federal Fund, quite hard -- potentially. It's a judgement call on the risk right now. And a default would hit Treasury securities due *now*. So the 1 year ones would be volatile in price but would likely not be subject to the default.

(there's a master thread on default here. I don't wish to speculate on whether it actually will happen, or what the consequences would be. Just to note the distortion in interest rates that it is currently causing at the short end of the US Government securities maturity curve).

Don't get too exercised re returns. Think safety. Safest thing you can do is 1 year CDs within FDIC limits. Split it between institutions.

Safety because you might need this money in a 1-3 year time frame.

For a longer time frame, you would invest according to your overall asset allocation: cash, bond funds, equity funds.

[RetiOpening]

1-year brokered CD ladder seems the easiest and safest to me. 3-, 6-, 9-, and 12-month durations. Money can sit in a MMF upon maturity.

[NiceUnparticularMan]

CDs are made for situations like this.

If you knew it would be well over 2 years, you could also consider a low-cost short-term TIPS fund like STIP/VTIP.

[mark_in_denver]

Why don't you just do a couple cd's?

[MikeG62]

OP, keep in mind that the MMF yields are subject to change at any time. If you intend to keep this money invested for at least 2 years, what are you going to do when MMF yields fall (and it will happen - almost assuredly over the next 24 months)? In that environment, you may not be able to get the yields you are currently seeing on one and two years fixed income (be those Treasuries or CD's).

My advice would be go longer on duration. Or you could go longer for a portion of the $500,000 and hold some dry powder in the MMF to hop on attractive intermediate term yields that might arise over the coming weeks/month(s).

Obviously, without a crystal ball, there is no knowing in advance what the best move will be. The best you can do is to make an informed choice based upon the information available to you at the time.

[daave]

Thanks for the thoughts and suggestions. On the other ideas added: brokered CDs, TIPS, longer-dated CDs:

Brokered CDs

Had a quick look at rates on Vanguard:

1-year CDs: I see callables at 5.45% (!), non-callables at 5.25%
2-year CDs: there are callables at 5.3% (callable this Dec); non-callables at 4.9%.
callable 12/23 in both cases

Longer-dated CDs

Merchants Bank of Indiana has 2-year and 3-year at 5.65%, both with 180d early-withdrawal penalty, so if I only hold for 12m the 1-year-equivalent yield is 4.24%. Not a bad trade-off to get that rate locked in for up to 3 years.

TIPS

I see 2.9% / 2.2% (nominal) on Apr'24 / Apr'25 TIPS, respectively. If CPI holds at 4.9%, that implies a nominal return of 7.8% / 7.1% (am I doing this right?). That seems kind of wild, does the market expect the inflation rate to tank?

Municipal bonds

I mentioned earlier I'm considering buying munis on account of my tax bracket. Take this bond for instance:

"Washington St Ctfs Partn Cops 5.0% due 7/1/2024 Callable 07/23@100 - Material Events"
This has a yield-to-maturity of 4.879%, and since it's federal income-tax free, the TEY is 7.74%!
Even if it gets called, the yield-to-call is 3.506%, TEY 5.56%.
Moody's rates this bond Aa1. This is not a "full faith and credit of the state" bond.

[geneva54]

I was looking into doing a CD ladder with Fidelity. I notice that the Treasury bills within Fidelity have about the same yield. Why not buy a combination of both of them?

[William Million]

Half in money market (in case rates continue to climb), half in a non-callable FDIC-insured CD (in case rates fall). And forget about it.

I don't think you're getting enough potential return for the hassle factor of some of the other investments you're looking at.

[000]

Yes I think the expectation is for CPI to lower.

For muni comparison, VWSUX has an average maturity of 1.4 years and YTM of 3.5%.

[daave]

Half in money market (in case rates continue to climb), half in a non-callable FDIC-insured CD (in case rates fall). And forget about it.

This is where I’m leaning, and can do it all in the Vanguard brokerage account, so super low-hassle.

Thanks for all the input!

[MikeG62]

Thanks for the thoughts and suggestions. On the other ideas added: brokered CDs, TIPS, longer-dated CDs:

Brokered CDs

Had a quick look at rates on Vanguard:

1-year CDs: I see callables at 5.45% (!), non-callables at 5.25%
2-year CDs: there are callables at 5.3% (callable this Dec); non-callables at 4.9%.
callable 12/23 in both cases

Longer-dated CDs

Merchants Bank of Indiana has 2-year and 3-year at 5.65%, both with 180d early-withdrawal penalty, so if I only hold for 12m the 1-year-equivalent yield is 4.24%. Not a bad trade-off to get that rate locked in for up to 3 years...

If you are in a state with an income based tax, you would probably do as well (on a tax equivalent yield) as either of those 1-year or 2-year non-callable CD's. So, why bother with something with liquidity risk like a brokered CD? I would assume the callable CD's will get called around the call date. Those do not interest me.

The Merchants bank CD's are flex rate CD's. This means the rate is not fixed for the duration of the CD. That is a hard pass for me.

[NiceUnparticularMan]

TIPS

I see 2.9% / 2.2% (nominal) on Apr'24 / Apr'25 TIPS, respectively. If CPI holds at 4.9%, that implies a nominal return of 7.8% / 7.1% (am I doing this right?). That seems kind of wild, does the market expect the inflation rate to tank?

Yes.

Generally speaking the expected nominal yield on TIPS is usually very close to the market yield on nominal Treasurys, such that you can just subtract the TIPS rate from the nominal rate to get a decent market expected inflation indicator. The nominal rate on 2-year Treasurys was 4.50% on 5/25, so it looks like the market inflation expectation over the next 2 years is around 2.3%.

The main point of using short-term TIPS instead of nominal instruments like CDs or Treasurys for something like a house fund is just that if inflation is higher than expected, then so might house prices be higher than expected, and TIPS will track that. However, over short periods there is so much else going on with house prices that is a relatively minor issue in most cases.

[daave]

If you are in a state with an income based tax, you would probably do as well (on a tax equivalent yield) as either of those 1-year or 2-year non-callable CD's. So, why bother with something with liquidity risk like a brokered CD? I would assume the callable CD's will get called around the call date. Those do not interest me.

I'm in WA, so state-income-taxes aren't a factor.

Nevertheless, it seems like the TEY for most of the muni funds I look at are no better than federal funds, with the exception of buying (somewhat riskier) individual bonds.

The Merchants bank CD's are flex rate CD's. This means the rate is not fixed for the duration of the CD. That is a hard pass for me.

Oi! So that's the tease in the advertising. Agreed, pass.

So it's basically a Money Market fund structured as a CD?

[MikeG62]

The Merchants bank CD's are flex rate CD's. This means the rate is not fixed for the duration of the CD. That is a hard pass for me.

Oi! So that's the tease in the advertising. Agreed, pass.

So it's basically a Money Market fund structured as a CD?

Worse as there is likely an EWP if you want out of the CD before maturity.

[ruralavalon]

I am in a low tax bracket and would use "VMFXX - Vanguard Federal Money Market, with an SEC yield of 5.03%".

[bendix]

What´s wrong with a short term federal money market? VMFXX for example. That´s what my parking lot looks like.

[sharx]

I have an almost identical situation to OP, except I am certain I need the money in 5 years (ARM goes adjustable rate) and am in NY (high state and local tax). This makes NY munis very attractive, but it seems like there are no NY-specific muni bond funds out there with a short enough duration.

Schwab says they can put together a NY-only muni ladder for me at the cost of 35 basis points. I am wary of active investments but it seems like I may actually come out ahead here when I do the math (I compared an iShares iBonds ladder vs the yields they quoted me minus their fee). Anyone else using similar services?

[Valuethinker]

Municipal bonds

I mentioned earlier I'm considering buying munis on account of my tax bracket. Take this bond for instance:

"Washington St Ctfs Partn Cops 5.0% due 7/1/2024 Callable 07/23@100 - Material Events"
This has a yield-to-maturity of 4.879%, and since it's federal income-tax free, the TEY is 7.74%!
Even if it gets called, the yield-to-call is 3.506%, TEY 5.56%.
Moody's rates this bond Aa1. This is not a "full faith and credit of the state" bond.

One thing Larry Swedroe really drove home, here, was the importance of really knowing what you are buying.

He said that the wealth management firm he was affiliated with would analyse each bond. So that would include:

- quality of issuer
- specific credit protections in that bond eg General Obligation etc

Several types of bonds, such as Economic Development (?) bonds have much higher default rates.

What I took from that is that for an individual investor, owning specific municipal bonds is taking on risk without additional return - ie diversifiable, non-systematic risk. I would not trust myself to do that kind of security-specific analysis correctly.

One thing I do know is you cannot necessarily rely on Credit Ratings. The client of the agency is the issuer, and that means they are slow to downgrade bonds - because it annoys the client. Now, default rates on municipal bonds are far less than they are on corporate bonds. Nonetheless, one is relying on a system which we know is not entirely impartial and is definitely not tilted towards the investor.

[Valuethinker]

PenFed 1yr CD (already a member) - 4.65%

Why not go for this? Split it 1, 2, 3 years?

As long as you stay within FDIC limits.

[NiceUnparticularMan]

What´s wrong with a short term federal money market? VMFXX for example. That´s what my parking lot looks like.

Mostly just the risk that rates will go down and the OP will end up averaging less than the current 1, 2, or 3 year rate over that time period.

And in fact, the inverted yield curve is telling you that is what the markets expect to happen.

[Weathering]

I have an almost identical situation to OP, except I am certain I need the money in 5 years (ARM goes adjustable rate) and am in NY (high state and local tax). This makes NY munis very attractive, but it seems like there are no NY-specific muni bond funds out there with a short enough duration.

Schwab says they can put together a NY-only muni ladder for me at the cost of 35 basis points. I am wary of active investments but it seems like I may actually come out ahead here when I do the math (I compared an iShares iBonds ladder vs the yields they quoted me minus their fee). Anyone else using similar services?

Definitely look at the prices of the muni bonds they try to sell you. Every day I see muni bonds being purchased at prices 2-3% above the current ask price. If they are able to buy the bonds for you at their price, then it could be a great opportunity. But, if they are selling the bonds to you above the market price, then you will effectively be paying way more than 35 basis points.

[bendix]

What´s wrong with a short term federal money market? VMFXX for example. That´s what my parking lot looks like.

Mostly just the risk that rates will go down and the OP will end up averaging less than the current 1, 2, or 3 year rate over that time period.

And in fact, the inverted yield curve is telling you that is what the markets expect to happen.

Wouldnt that be more a problem of long-term bonds and not so much short or ultra-short term bonds?