Cash forms a significant part of a comprehensive investment portfolio. However, not all cash-based investments yield similar returns. Currently, the highest paying Certificate of Deposit (CD) in the U.S. offers an annual percentage yield (APY) of 5.50%. Comparatively, the top U.S. Treasury bond (20-year term) offers a par yield of 4.84%. You also have the option of high-yield savings accounts which offer up to 4.75% in the current market.
While it seems beneficial to go for the highest return, other considerations play a crucial role. One such consideration is liquidity, CDs have a fixed interest rate and a specific term which can range from three months to 10 years, during which you can't withdraw without penalty. Contrastingly, high-yield savings accounts allow you to withdraw funds at will, but the interest rate can fluctuate.
Another factor is the volatility of returns. Unlike CDs or savings accounts, Treasury Bonds can be traded on the secondary market, affecting the bond’s resale price, and potentially altering your total return if it's sold before maturity.
Furthermore, the frequency of interest payments differs across these options. High-yield savings account payments depend on the bank and are usually credited monthly. CDs usually pay interest on maturity, but some long-term CDs may offer periodic payments. Treasury Bonds pay interest every six months.
To minimise risk, diversification across these cash vehicles is ideal, unless you prefer liquid assets, regular interest payments or the ability to resell bonds. For example, you can withdraw cash instantly from high-yield savings in case of emergencies or sell bonds at a higher price to increase returns if bond values rise.
Your return is also influenced by broader economic indicators such as the Federal Reserve's key interest rate, inflation, and political policies.
According to Investopedia, to qualify for their rate data from over 200 banks and credit unions that offer CDs and savings accounts, the institution must be federally insured and the account's initial deposit must not exceed $25,000 without specifying a deposit amount less than $5,000. The banks involved must operate in at least 40 states and credit unions requiring a donation of $40 or more are excluded.