Rates on short-term bonds and money market funds are at multi-year highs, finally giving savers a return on their cash holdings. The 90-day U.S. Treasury Bill yields slightly over 2% currently, yet more and more investors are seeing their brokerage cash balances swept into bank deposits that are yielding .25%. What gives?
Now that the cost of executing trades has come down to $0.00 (JP Morgan to offer free trades) the brokerages have to find a way to monetize those uninvested cash balances. In order to do so, they are sweeping uninvested cash into low yielding products allowing the brokerage firm to invest in higher yielding short-term assets and profit off the spread. As Jason Zweig at the Wall Street Journal points out, this allows the brokerage firm to “to earn in excess of 1% annually on their customers’ cash in bank sweeps, while passing along a fraction of that to their customers.” Merrill Lynch Joins Brigade Downplaying Money-Market Mutual Funds
Instead of allowing your broker to pocket the higher yields from your cash balance, invest in short duration U.S. Treasuries either through individual bonds or through a mutual fund or ETF.