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Online Savings & Money Market Account Rates 2020

Online Savings & Money Market Account Rates

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If the US Defaults in October, Is Cash the Only Safe Place to Hide?

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Cash is always the safest place to put your money in a crisis. Against the prospect of a dramatic slowdown in the economy stemming from a sovereign default, cash again seems like a safe haven. A US default will lead to real stock and bond market declines and almost certainly a drop of commodity and real estate values.

Even in periods of historically low rates on cash instruments, savings and money market accounts often outperform all other instruments, especially if all other instruments suffer a synchronized decline following major economic disruptions. 

With online instruments offering 0.85% to 0.90% these days, cash is not sexy.   In fact, those who stayed heavily in cash over the last four years have missed out on a historic move in the stock market.  They have also missed out on bond and asset price appreciation.  Perhaps most importantly, they have lost purchasing power as savings and money market accounts have not kept up with inflation (especially after accounting for tax consequences).

Today, real estate, bonds and the stock market have all seen dramatic and real runs, not all entirely consistent with economic realities.  Regardless, the impasse in Washington and the prospect of a sovereign default by the US if the debt ceiling is not raised, argues especially persuasively now in favor of stepping aside for a bit. 

Of course investors with a time horizon beyond a couple of weeks would be imprudent to dump all assets and move completely into cash. With the Fed having chosen not to taper and the dovish history of the likely incoming Chair, Janet Yellin, who is committed to keeping rates low until unemployment falls below 6.5%, cash may not be an ideal place even at this time to assign new money. 

Many private and institutional investors, rather, have been focusing on high quality corporate bonds ever since the Fed’s announcement in September that it would not begin tapering at this time.  As I survey the landscape, one bond-like instrument that seems particularly interesting at this point is Public Storage’s preferred stock. 

I first wrote about Public storage’s preferred stock on BestCashCow in 2012.   All of the classes of Public Storage preferred stock that were available then were called at par value ($25) late in 2012 and early in 2013; the company subsequently issued new shares in the form of Class V and Class W at lower yields - approximately 5.25 and 5.45%.   Each class pays dividends quarterly and both traded above par earlier this year, soon after they were issued.  As of the date of this publication, however, both shares are significantly discounted with the V shares trading around $21 a share and the W shares around $20 a share.  In other words, both shares are trading with effective yields, plus or minus, of 6.45%.

While these shares have fallen quite sharply over the summer as long term bond yields went up, Public Storage (PSA) appears a very safe company in the face of a potential new Congress-initiated recession.  The Company is efficient and effective and its business model is pretty much recession proof.  Its debt and preferred stock, as a percentage of gross assets, is at historically low levels (below 30%) and it faces virtually no debt refinancing obligations in 2014.

As I noted in my 2012 article, preferred stock is an animal in and of itself and is ordinarily not a good place for individuals to park cash (largely because they are instruments of indefinite duration and because individuals cannot take advantage of many US tax incentives on ownership of preferreds made available to corporate purchasers).

Public Storage’s preferred stock is currently rated Baa1 by Moody’s, having been upgraded in late 2012.  While there is real risk of a decline in principal (a continued decline in principal for holders of the initial issuance) if and when interest rates rise again, a 6.45% yield on a Baa1 instrument is not otherwise attainable at the moment. Therefore, Public Storage’s preferred stock just might be a place for those investors seeking protection and return to assign some of their cash while waiting for Washington to sort itself out.

Massachusetts' Depositors Insurance Fund (DIF) Is Important for High Net Worth Depositors to Consider

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Many Massachusetts-based banks now offer competitive online savings accounts. Can depositors rely on the Commonwealth's Depositors Insurance Fund and deposit amounts over FDIC limits in these banks?

The Depositors Insurance Fund (DIF) was created in 1934 and, while independently operated, includes all Massachusetts licensed banks as members.  According to DIF’s website, the Fund extends coverage above and beyond FDIC limits to depositors at member banks regardless of their states of residency.

DIF has over $350 million in assets. During the recession of the early 1990s, the worst financial period in the history of the Massachusetts savings bank industry, DIF paid out more than $50 million to protect over 6,500 depositors in 19 failed member banks.   During the 2008 to 2011 bank crises, the DIF was not affected by the spate of bank failures as none of its members were among those banks that either failed or were seized by the FDIC.  Funds in the Massachusetts DIF are highly regulated today by the Massachusetts Division of Banks, and the fund again has significant reserves on hand to cover failures of member banks.

There are now three highly competitive online banks in Massachusetts, all members of the DIF.  Assuming the DIF website is correct that all depositors are covered regardless of their state of residency, a depositor who might otherwise be inclined to keep online savings accounts below the FDIC’s individual $250,000 insurance limit could now be covered in depositing well over that amount in a DIF member bank.

EBSBDirect, a subsidiary of East Boston Savings Bank, currently offers online depositors 2.50% on deposits up to $1 million in an online savings account.  Bank 5 Connect and Salem Five Direct are also Massachusetts-based banks that are covered by DIF and that have been competitive in the online savings / money market and CD spaces in recent years.   

Some Massachusetts-based banks have had some customer service problems in the past, and they may not provide online banking interfaces or customer services comparable to Ally or Marcus.  Salem Five Direct has bank fees that are excessive for online savings accounts and make it a less than desirable place to put cash that may be needed quickly and/or often.  BankFive Connect has a website with nice pictures but relatively sophomoric customer service.

Depositors for whom FDIC limits are not an issue may find that it makes more sense to stick with well-recognized online banks and their superior customer services.   Even many depositors with $2 million or so to deposit in online savings accounts may find that they can achieve their goals and stay within FDIC limits by distributing their money among several banks with outstanding customer service.  However, depositors seeking to hold significantly larger amounts in online savings and money market accounts may find the protection they require from Massachusetts’ DIF insurance and deposit amounts above FDIC limits in one or more of these Massachusetts-based online savings and money market accounts.

Duke Energy's PremierNotes Are An Inappropriate Place to Stash Cash

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Duke Energy has begun to advertise an unsecured commercial paper program. While the company is offering yields that are as high as 1.51%, these notes are uninsured, and hence represent an inappropriate place to stash cash for most.

No matter what the environment, most people have some amount of money that they cannot afford to lose.   And, in order not to lose the money, they refrain from investing it in riskier assets and accept a so-called risk-free rate.  Risk-free rates are historically savings accounts, CD rates and the 10-year US Treasury.   Today, the US Treasury curve is very compressed, causing many to argue that treasuries and even short-term CDs involve a risk to principal should rates rise.  Hence, the only real risk free asset at the moment are cash accounts (savings or money market accounts) and those are only risk free when amounts over $250,000 per individual per insitution are spread across multiple banks or credit unions.

Against this backdrop, Duke Energy has sought to introduce something new for investors to stash cash. PremierNotes program are according to the Duke Energy website:

"... direct investments in new debt obligations of Duke Energy. Under the program, Duke Energy borrows directly from investors by issuing notes. In return, investors receive a competitive floating rate of interest that is very favorable compared to other cash alternatives like bank accounts, short term CDs and money market mutual funds."

Companies offering notes directly to investors is nothing new.[1] Duke is currently offering 1.51% on balances over $50,000 in its PremierNotes program.  Longer term, it commits to return 25 basis points above average money market fund rates.

Even though the rate on deposits over $50,000 is above any current savings or money market rate, most depositors will find that the slight increase in yield does not justify the risk involved in foregoing FDIC or NCUA insurance and relying entirely on Duke Energy’s ability to pay.   Duke’s junior unsubordinated debt is rated BBB-/Baa3 and its commercial paper rating is A-2/P-2.

Duke Energy, of course, is a great company.   It is the energy producer and distributor in the fastest growing region in the US.  Its equity is yielding 4.20% and while expensive on a historical P/E basis, it can be hedged in a manner in which you would receive about the same premium for your exposure to the company and still get all the upside.  For most, that is a far better way to play Duke.


[1] The idea of a place to stash cash that outranks savings and money market accounts and is secured by the credit rating of a major conglomerate, and not by the FDIC or NCUA is not all together new.  Companies such as GE, Ford and GM have occasionally targeted depositors and investors for their cash accounts with commercial paper programs.  Most companies discontinued these programs. GE still offers a program, called GE Capital Invest Direct or GE Capital Interest Plus, that today offers depositors 1.11% on deposits over $50,000; it is virtually unknown and should be completely avoided as depositors can get rates that are higher or as high from several FDIC and NCUA-insured institutions