Cash Becomes A Hot Investment; Stock Volatility, Rising Rates Prompt Investors To Shift Into Money-Market Funds and CDs
YOUR CASH is no longer trash.</br></br>Thanks to a string of 16 consecutive Federal Reserve interest-rate increases since June 2004, investors have been earning substantially more on their money. In recent weeks, yields on some money-market mutual funds and short-term Treasury bills have crossed 5% -- their highest levels since 2001. That follows earlier moves by some banks to boost yields on certificates of deposit past 5%.</br></br>After a number of years in which historically low interest rates caused investors to overlook cash -- if not shun it outright -- Wall Street is once again treating it as a serious option, as are individual investors, who are pouring money into it. And higher yields aren't the only lure. Stocks have swooned in recent weeks, with the Dow Jones Industrial Average dropping 199 points yesterday, and investors have grown skittish about inflation and higher interest rates and their effect on stock and bond returns.</br></br>Yesterday the government issued a new batch of six-month Treasury bills paying 5%. Money-market mutual funds managed by Morgan Stanley and the asset-management division of Credit Suisse, a unit of Credit Suisse Group, began paying 5% late last month. These funds are primarily geared to pension funds and institutions, although some high-net-worth investors may get access to them through their advisers or private bank.</br></br>If the Federal Reserve raises short-term interest rates from the current 5% when it meets later this month -- as Chairman Ben Bernanke has signaled he may well do -- then many of the retail money-market funds open to small investors are likely to cross the 5% threshold within weeks. That is because the rates on money-market funds, which invest in short-term debt, are determined by market rates. If the Fed declines to raise rates, then yields on money-market funds are likely to stall out just under 5%, says Peter Crane, publisher of Money Fund Intelligence.