The Search for Cash Alternatives

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4 min
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As the team's Capital Markets Analyst, Jacob conducts market and investment research and assists in the development of business strategy to serve our clients more effectively.
May 9, 2023

It is unsurprising that people and investors are looking for cash alternatives. After the collapse of Silicon Valley Bank is when people started noticing two things, “I can get better yields on my savings [money markets and treasuries]” and “is my money actually safe at the bank.”

The banks whole business model is not what people want, essentially they are a fixed income portfolio manager. People want the bank to be a safe place to park their savings, but that model isn’t profitable. Instead the bank borrows your cash savings (short term money) and lends it out at longer intervals, sometimes in 5 year government notes and sometimes in 30 year mortgages. They capture the spread between what they pay you and what they get from investing, but you rarely know what they are doing with your cash.

The longer the term is on bonds the more price sensitive they become. Your $10,000, if it were invested in 3 month T-bills, would move very little in price. However if the 30 year prime rate on a mortgage goes from 2.5% to 6% those 2.5% 30 year mortgages the bank wrote are now priced down dramatically. The reason is all bonds mature at par, so if the bond was issued at $1,000 it will return $1,000 at the end, but it could be worth $500 in the middle, because the price of the bond reflects the difference between current and issued rates. Why would someone want to buy a 2.5% bond when they can get a 6% bond, so you have to offer a discount to meet the 6% requirement.

Money market funds are the easy way to get access to your own short term government bonds. For a small 0.17% annual expense, in some cases, you can earn the 4.5% those bonds are paying, without needing to buy new bonds every 30-90 days.

This also has an effect on stock prices, and asset allocation. If we think stocks are only going to move maybe 9% higher this year, but municipal bonds have a tax equivalent yield of 6-7%, it seems goofy to be allocating more to stocks. That makes the stocks cheaper (similar to how bonds get priced down) because they have to be offered at a discount to buyers, which is what happened in 2022.

Then we get into gold and bitcoin, otherwise known as dollar hedges. Both of these assets climbed after the Silicon Valley Bank news broke. But liquidity crises and bank runs shouldn’t have a real large effect on the value of the dollar, however the debt ceiling does.

We have two coinciding events occurring in lockstep to support a dollar hedge rally. A failure to raise the debt limit would surely devalue the dollar by some amount (certainly not to zero), however I view that as a nonevent, as I stated in my last Chart of the Week.

I also believe gold is a poor investment as it’s risk reward statistics are worse than both stocks and bonds. It has larger drawdowns and not very supportive gains, which means for the volatility you are just not fairly compensated as you are elsewhere. The jury is still out on Bitcoin, but because of it’s volatility, unfathomable gains, and relatively short record, it’s hard to get a real good reading on it.

What’s purely interesting is the tracked movements in these assets and it will be interesting to see the changes as the fears in the banking sector and debt limit calm.

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