IT WASN’T LONG AGO that a saver could make a few bucks in a money market fund. In late 2018, the Federal Reserve had hiked short-term interest rates. By early the next year, Vanguard Federal Money Market Fund (symbol: VMFXX) was sporting a yield near 2.5%.
While it might take years to see that sort of juicy risk-free rate again, market observers now believe the Fed will begin a tightening cycle that will lead to higher short-term interest rates. Investors will get an update from Federal Reserve Chair Jerome Powell during his press conference on Wednesday.
Here’s something you can check today: There’s a nifty tool to view the implied future federal funds rate. Right now, it’s suggesting that a money market account might yield 1% by late 2023 and perhaps even 1.5% three years from now. In other words, don’t get your hopes up for lofty money market and savings account yields just yet.
Concerns over inflation are driving the expectation of higher rates. Just last week, the five-year forward breakeven rate, a measure of expected inflation, climbed to almost 3%, the highest reading in its 18-year history.
What’s strange about the recent jump in inflation fears is that medium-term and long-term Treasury yields are under 2%. Perhaps long-run economic growth expectations are tapering off, and that’s reflected in today’s modest yields. One result: To notch a 4% yield, bond investors are currently forced to own high-yield junk bonds.
We, as small investors, have an advantage, however.
A lot of ink has been devoted to Series I savings bonds over the past six months—with good reason. The annualized yield, which will be updated tomorrow, is likely to be near 7% through April 2022. Even though that lofty rate likely won’t last long, if the market is correct and inflation averages 3% during the next five years, inflation-linked bonds would beat the pants off a five-year Treasury note, which currently offers just 1.2%.
Since the annual purchase limit is $15,000 per person—$10,000 through regular purchases and $5,000 using a tax refund—it doesn’t make much sense for the super-wealthy to bother with Series I savings bonds. But regular folks might amass a position, while they await better money market rates.