Households Pile $5.2 Trillion Into Money Funds as Real Yields Turn Negative

CD yields are starting to climb. Brokered CDs now offer yields above 4% APY for terms of nine months or longer at some brokers, beating T-bills. That suggests banks expect rate hikes and are competing for deposits from yield-seeking buyers.

For investors holding cash in MMFs and CDs, the math is straightforward. The nominal yield on these instruments is below the current inflation rate, meaning purchasing power is shrinking. The Federal Reserve may raise rates later this year – the bond market currently prices the first hike around year-end and another in 2026 – but even if those hikes materialize, real yields will likely remain negative if inflation stays elevated.

Inflation eats everyone's lunch one bite at a time, sometimes more slowly, other times faster, whether real estate or stocks or bonds or cryptos or MMFs or CDs. Some other investments come with the hope of big capital gains that will outrun inflation. That has a history of working, and of not always working. If those investments have capital losses, the curse of inflation is added to the capital losses, making those losses even harder to swallow.

Other investments come with automatic inflation protection. Treasury Inflation Protected Securities (TIPS) and Treasury I-series savings bonds earn an inflation protection amount based on CPI that is added to the principal as it occurs, plus a low separate yield.

And by the looks of it, higher-than-2% inflation is here to stay. Neither this administration, nor probably the next administration, nor the Federal Reserve, nor Congress is unhappy with inflation in the 3-4% range or maybe in the 3-5% range. That type of inflation makes the fiscal mess the US is in a little less unsustainable.