Zero Return on a T-Bill? Give Us a Break

This is what a stampede of bears looks like. So much panicked cash is pouring into government bonds from every corner of the country and the globe that short-term Treasury yields actually turned negative, albeit briefly, on Tuesday. The old adage that the return of your principal is more important than the return on your principal is wise and true. But this is getting ridiculous.

Retail investors need not join this herd. True, Treasurys are the ultimate in security, but essentially paying the government to preserve every scrap of cash you hold isn't necessary — or necessarily smart.

There are alternative safe harbors in which to anchor your cash. They offer more than enough security for most folks' needs, but offer higher yields and better liquidity, too. They're called savings accounts, CDs and money-market mutual funds.

For those in need of a quick recap: On Tuesday the government sold $30 billion in four-week Treasury bills at zero percent. That's the first time that's happened in the bills' seven-year history. Even worse, the yield on the three-month bill turned negative for a bit — something that hasn't happened since the Great Depression. (Remember that when bonds trade, yields and prices move in opposite directions.) Meanwhile, the yield on the benchmark 10-year note is flirting with 2.7%, a level not seen since World War II.

In other words, investors are willing to accept no return or even a negative return on their principal in exchange for the knowledge they will actually get their principal back.

"It's totally insane," says David Wyss, chief economist at Standard & Poor's. "Everyone is scared stiff of anything resembling risk. I thought bond yields would be going up by now."

This stampede might make sense for the giant pools of money held by entities like banks, brokerages, institutional investors and their foreign counterparts. It makes less sense for the more modest sums of cash held by regular Joes. As Treasury yields plummet, the traditionally low yields on savings accounts, CDs and money-market funds look much more attractive, indeed.

It's hard to beat a savings account for liquidity, and your deposits are insured up to $250,000 per FDIC-backed financial institution, at least until the end of 2009. In just one example, you could open a no-fee, no-minimum HSBC (HBC) online savings account and get an annual percentage yield of 3%.

Meanwhile, banks, eager to beef up deposits and shore up balance sheets, are still offering competitive yields to attract CD shoppers. The average overnight rate on a one-year CD stands at 3.22%, according to Bankrate.com, and climbs to 3.60% for a five-year commitment.

Remember that CDs are included with your other deposits at any FDIC-backed institution, so depending on the size of your nest egg be sure to spread your money around different banks to stay within the $250,000 limit. You might also want to ladder your CD portfolio to maintain liquidity and offset interest-rate risk.

Finally, don't forget money-market funds. Between the Treasury Department's emergency insurance program for existing deposits and the return of billions of dollars that originally fled these funds, they appear solid once again, and yields reflect that fact. Vanguard Prime Money Market's (VMMXX) seven-day yield stands at a respectable 2.51%, according to Crane Data. 

As a final reminder, a liquid yield of 2.51% is nothing to scoff at these days, especially as all that money flooding the Treasury market causes disinflation or even deflation in the nearer term. As S&P's Wyss points out, what comes from inflation is total liquidity. This situation is pretty much the opposite.

"That's the problem," Wyss says. "You've got plenty of liquidity going into government bonds, but there's nothing going into the private sector."

Until that reverses flow, the security and yields of boring old savings accounts, CDs and money markets are a sensible place to park some cash. Add a dash of disinflation, and these plain-Jane products are suddenly kind of hot.