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The Wonders of Cash

A money-fund expert says those sweet 5% yields will be around for a while.

Peter Crane co-founded Crane Data, a Westboro, Mass., publisher of news, commentary and performance measures of money-market funds and bank savings accounts.

KIPLINGER'S: Where are cash returns headed?

CRANE: Five-percent yields on cash should last for the foreseeable future. It's increasingly likely that these interest rates will be flat all year. The market had been predicting cuts. But those predictions have evaporated because the economy is showing resilience and the housing sector is not falling apart. Even if interest rates aren't moving higher, they look better on a relative basis as inflation falls. Inflation has been running at a 2.5% annual rate. Now it's heading back to 2%.

Should we lock in high yields? You don't get paid right now for locking in -- say, with certificates of deposit -- or extending maturities. Money-market yields are terrific, especially on mutual funds, which are thrashing most banks. In falling-rate environments, banks hold the advantage because they may decide to compete more aggressively for deposits. But at just under 5%, money-fund yields are double the average rates banks now pay.


Are tax-free money funds an even better deal? Unless you're in the highest federal bracket or in a high-tax state, there's really no advantage to tax-free funds now. That market is much thinner and rates are extremely volatile. At year-end, for example, they're driven by supply and demand. As everyone writes checks for holiday shopping and other year-end expenses, tax-free yields go through the roof. As that cash is deposited, rates fall.

How does cash rank as an investment? Relative to inflation and historically, 5% is fantastic. If you look at the long-term averages, the best case for bonds is about a 7% return annualized, and for stocks, 9% or 10%, with the risk that you could lose money. Compare that with 5% virtually risk-free. Still, some $4 trillion to $6 trillion sits in accounts yielding below 3%. That's throwing money out the window! If you're talking about more than a few thousand dollars and more than a percentage point or two, that's real money.