For the past few years, savers had it easy. Money market funds and short-term Treasury bills paid more than almost anything else in the bond market, and you didn’t have to lock your money up to get it. There was no decision to make.
All that has started to change.
The chart above shows the yield on a 1-year Treasury minus the yield on a 1-month Treasury. Think of it as how much extra you get paid for setting money aside for a year instead of a month. Above zero, the 1-year pays more. Below zero, cash pays more.
From the summer of 2023 through this spring, the line sat below zero for 33 straight months, the longest stretch in the 25 years of data. At its most extreme, in the summer of 2024, a 1-month bill paid a full percentage point more than a 1-year.
This year, the line flipped. The 1-month Treasury has barely moved—3.72% in January, 3.81% today—because it follows the Fed’s rate, and the Fed hasn’t changed it. The 1-year, meanwhile, has climbed from 3.48% to 4.17%. Setting money aside for a year now pays 0.36% more than keeping it in cash.
Why? Because investors expect the Fed to raise rates a couple of times over the next year, and the 1-year yield already reflects that. That’s an important point. If the Fed does raise rates next week, it won’t change this picture much, because it’s already built in. Locking in a year works out better if the Fed ends up doing less than expected. Staying in cash works out better if it does more.
The bottom line? Cash still pays a solid yield, and it’s the right place for money you’ll need soon. But for money you won’t touch for a year or more, the market is paying you for your time again for the first time in three years.
For a while, there was nothing to think about. Now there is.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.