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Is Cash No Longer Trash?

Charlie Bilello profile picture
Charlie Bilello

Short-term bond yields (one-month through three years) are hitting their highest levels in over nine years.


The market (Fed Funds Futures) is expecting the Federal Reserve to hike rates three more times in 2018:

  • A 25 basis point move in March,
  • a 25 basis point move in June, and
  • a 25 basis point move in September.

This would bring the year-end Fed Funds Rate to a range of 2.00-2.25%, its highest level since September 2008.

So is cash no longer trash?

That depends on your definition of "trash." If by "trash" you mean a nominal rate close to 0%, then yes, it is certainly not trash anymore. But if by "trash" you mean an interest rate below inflation (negative real yield), it would still hold that moniker.

A positive real yield (yield above inflation rate) is something cash-like instruments have lacked during much of the past nine years as the Federal Reserve has maintained easy monetary policy far longer than any prior period in history. The Fed held short-term interest rates at close to 0% for seven years (December 2008 to December 2015) while inflation was still positive (averaging 1.7% per year), meaning cash holdings failed to keep pace with rising prices. During this period, "trash" was a fair depiction, as the loss of purchasing power was over 12%.

Data Source: BLS, Stern.NYU.edu/~adamodar, FRED

In December 2015, the Fed finally raised rates off of 0%, but thus far it has been the slowest hiking cycle in history with only five quarter-point hikes in the past two years (current range of 1.25-1.50%). Inflation averaged 2.1% in both 2016 and 2017, meaning "trash" was still a pretty accurate depiction.

But with the Fed expected to hike this month (to 1.50-1.75%) and again in June (to 1.75-2.00%), cash is becoming less trash-like by the day. If

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Charlie Bilello profile picture
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Comments (14)

Drftr-If the dollar continues to drop 10% or more per year, how attractive does that make our bonds to European and Japanese buyers?
Extremely attractive, as 1) they buy the bonds cheaper and ) with a higher yield than anything back home. What is not to like? Especially when realizing that both trens may / will reverse at some point so again you'd gain twice. For gains in one cycle isn't bad. Of course this depends on how long the dollar slides against that currency.

Please let me know if this theory is flawed as I'm here to learn, not to teach.


That assumes the US and their country are the sole options, that interest rates won't rise, and that there are no better options. If they have to get out of individual bonds before they mature, and interest rates have risen, which is likely, they lose principal, and lose against inflation/currency risk. If they buy a bond fund, and get out at any point when interest rates have risen, they lose twice again.
Thanks. If you're buying bonds to trade then I would agree. If you ladder for the income and/or as a hedge I think it would be different.

If the short term bond starts yielding even more, many European and Japanese investors may jump in as for them that kind of yield with close to zero risk is enormous. Not sure if that could cap the yield.

donkarlos profile picture
yield is demand driven, not priced by the seller, risk is a factor in the yield bid, i fail to see investing in US dollar to be a zero risk investment, enter supply and demand, the supply of dollars has exceeded the demand of international investors, and the gap is made by whole by mystery buyers, some us retail, and retirement accounts. It is a new world in shared information.
Total Return Investor profile picture
Trash by definition has no worth. An asset category that provides immediate liquidity and no short term risk has never fit that definition, and never will. The trick is to keep your allocation to cash in perspective in a balanced portfolio. Either too much or too little of it can be harmful to your financial health.
Cash is always trash, it always approaches it's intrinsic value of 0. It is an investment with %100 chance of loss.
Great comment.

By the way, you do realize holding cash made more money than equities, gold and bonds in for example 1981 and 1984, right?

Eric Peterson profile picture
nustada: "It is an investment with %100 chance of loss." If you have any cash, I'll take it off your hands for 50 cents on the dollar. Then you won't lose 100%.
As an old, retiree investor, I keep 30% in short T-Bills, 30% in laddered bonds, 30% in ETF across the sector food groups, and 10% in discretionary, opportunity money.....GLTA traders and investors.
If cash is trash then what does crypto currency become ?
"If cash is trash then what does crypto currency become ?"

Nuclear waste.
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