Crawling Road

With the Euro under pressure from a possible Greek default, there is a chance that we could have another repeat of 2008 with large banks going under. So what is the best way to hold cash to avoid being caught in a failed bank and have to wait (and hope) that FDIC may come to your rescue? There are only two choices for US investors:

1) A Treasury Money Market Fund

2) Short Term Treasury Bonds

For the Cash portion of the Permanent Portfolio Harry Browne always recommended using a Treasury Money Market fund that is 100% Treasury T-Bills and nothing else. This is outstanding advice for the following reasons:

1) T-Bills are the most liquid form of paper asset on the planet. They can be sold instantly when you want the cash.

2) They are backed by the full faith and credit of the US Govt. which can tax or print money in order to meet their obligations (neither is good, but at least you get your money back with some kind of value vs. nothing).

3) You do not need to worry about insurance limits like FDIC accounts will have.

4) You do not need to wait for the failed bank and FDIC to allow you access to your funds in the event of major a widespread banking panic. This could lock up your assets while things are sorted out.

5) They aren’t taxed at the state level like many CDs and other types of cash interest is.

Now I also mentioned using Short Term Treasury Bonds. This is my own modification to the Permanent Portfolio and I only recommend this if you have at least a year of living expenses in a very safe Treasury Money Market Fund first. Even then, this is optional because this fund has slightly more interest rate risk. Meaning that if interest rates go up you may take a small loss while the fund cycles out lower interest T-bills and brings in higher paying ones. This process can take a year or two with a typical Short Term Treasury fund to work out. By having at least a year of living expenses in the Treasury Money Market you can ride it out while the Short Term Treasury fund value recovers.

Some More Specifics

Treasury Money Market or Short Term Treasuries are the safest way to hold cash. Barring a failure at your brokerage, they can be traded instantly. They also have no insurance limits.

FDIC accounts are subject to problems if we were to get a large number of bank failures. While the obligations may eventually be covered, you are at the mercy of the bank and FDIC when you can remove your funds. So far it has been seamless with respect to bank closures and customers, but this doesn’t mean it will remain so if there is a large banking crisis.

So if you are interested primarily in being able to get your money out no matter what, then Treasuries are your best bet as they are top of the food chain in terms of paper assets. If you can’t sell your Treasuries to raise cash then the alternatives are in even worse condition.

If you use a Treasury Money Market there is little interest rate risk. Short Term Treasuries have only slightly more. As an alternative to Treasury Money Markets (which may be closed to new investors or not available at all fund providers) you can look into iShares Ticker SHV which is their very short Treasury ETF which is essentially the same thing a Treasury Money Market would hold. There is also the SPDR Ticker BIL which is another 1-3 month T-Bill ETF. Both of these funds hold in excess of 99.7% in Treasury Bills (the remaining less than 1% are probably funds to handle redemptions). They are therefore essentially 100% Treasuries which is exactly what you want. These ETFs will have trading costs though so you don’t want to have many small transactions as it will eat into your returns.

Yes, these and other short term Treasury funds are yielding around 0%. That’s just the reality of the markets. I encourage you to just accept what it is and not try to chase yield with your cash. This is a really bad idea (read the comments at the bottom of that article, please). 

What about Vanguard’s Treasury Bond Funds?

Beware that Vanguard’s Treasury Bond fund offerings can only be 80% Treasuries and 20% “Other.” Meaning not direct Treasury issues but agencies, repurchase agreements, etc. at management discretion. This is according to their prospectus. I recommend not using any Vanguard Treasury Bond funds for this reason (they all do this). You don’t need to have Vanguard’s bond managers doing cute things behind the scenes and exposing you to risks you didn’t think you had. The iShares and and SPDR products I listed above are better options for those looking to hold the safest kind of cash.