Stash Your Cash

I’m told that Grandma Wojciechowski took a pail of coins into the dealership to buy a Chevy Nova circa 1965. When Grandma died in 2001, my mom and dad found $35,000 in cash stashed in various nooks and crannies in the house. Stashing cash in the house was a strategy born out of mistrust of the banks and the general concept that “under the mattress” was the safest place. Grandpa was born in 1912 and grandma in 1920, and both experienced the painful years of the Great Depression. Then grandpa lost his job at Studebaker when it shuttered its South Bend plant in 1963. So, in many ways, their mistrust with institutions was understandable.

Grandma Wojciechowski decorating cakes for a living in the 70s (Source: South Bend Tribune)

The Great Depression ushered in an era where the government formally backed bank deposits. And government treasuries are widely viewed as the safest investment in the country, if not on the planet. However, over the last 40 years of bond movement left rates at near zero.

As a result, we hear from many of you that you have cash in your savings or checking accounts and are earning next to 0% on it.

We see a near-term opportunity to stash your cash. As the Federal Reserve has raised rates, all US Treasury bond interest rates have gone up. For example, as I type this, the yield on a 12 month Treasury is 2.03% and the yield on a 2-year Treasury is 2.58%. If we buy the 12 month Treasury and hold it to its maturity at 12 months, we are guaranteed the 2.03% return. A US Treasury bond is, by definition, the “risk free” rate. Frankly, it’s safer than even a CD. A CD is FDIC insured up to $250,000, backed by the US government. US Treasuries ARE the US government.

We wouldn’t buy something as long as a 5 year Treasury since rates may rise significantly by then and you would have foregone the potential to earn a higher return. We would focus on either the 12 month or the 2 year Treasury. We think the yields on these Treasuries balance providing a return with providing access to the cash in a short enough time horizon.

Treasuries also provide a tax advantage - These investments are State tax free.

If you’ve watched closely, you may see that we moved away from most bonds in your accounts. And you may be asking why I would recommend Treasury bonds while making those moves? Bonds have historically been a critical part of most portfolios because they reduce risk while providing a steady return. Bond prices move around less than stocks providing stability to a portfolio. We got out of (most) bonds in January of this year. Why? The bond market had been in a 40 year bull market with prices escalating since 1980.  This escalation pushed bond interest rates down to near 0% (see the chart below). With the Federal Reserve signaling they would raise interest rates to combat inflation, we felt it was likely bonds would suffer. In 2022, the US aggregate bond index is down 9.25%.

Bond mechanics can be confusing. And I won’t go into all the details here. The cliff notes explanation is that bond prices move inverse to interest rates. When bond prices go up, interest rates drop. And vice versa.

We still think the aggregate bond market has further room to drop before we jump back in with both feet. We wouldn’t be surprised if the bond market stabilizes while digesting the Fed’s moves before dropping more as interest rates rise upward. If we give bonds a bit more time to drop, we will get the benefit of missing the price depreciation and we will realize a higher dividend yield once we put your money back to work.

The bottomline: we view short term Treasuries as a near-term opportunity to stash cash you would otherwise have in a bank account. We can buy those Treasuries and hold them to maturity, eliminating the risk of price fluctuations. The broader bond market is still facing downside risk especially bonds with longer maturities. If you are willing to dump your pail and pull the money from the mattress, short-term Treasuries are worth a look.

Jared

Brian Kellett, brian@kellettschaffner.com. Phone 513-312-6067

Dave Bodnar, david@kellettschaffner.com. Phone 513-258-6973

Jared Kline, jared@kellettschaffner.com. Phone 513-768-2238

Kellett Schaffner Wealth Advisors LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Kellett Schaffner Wealth Advisors LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Kellett Schaffner Wealth Advisors LLC unless a client service agreement is in place.