The Great Yield Chase: Why A Trillion Has Fled Traditional Bank Accounts

Rising interest rates and a trio of regional bank failures have turbocharged the movement of cash into higher yielding alternatives–particularly money market mutual funds. Here’s how to bump up your own yield.

The movement of funds out of traditional bank accounts started slowly at first in the spring of 2022, after the Federal Reserve belatedly began its battle against pandemic-era inflation by raising interest rates. It accelerated dramatically this past March, when Silicon Valley Bank became the first of three large regional banks to fail this year. In all, over the past 13 months, a staggering $1 trillion in deposits has left the commercial banking system.

No, despite the lightning speed bank run that toppled SVB, depositors haven’t been panicking en masse. They aren’t pulling money out of the banking system to stuff into their mattresses–U.S. commercial banks still hold $17.15 trillion in deposits. Instead, bank customers have awakened to the fact that without much extra effort or risk, they can be earning 3% or 4% or even 5% in interest a year on cash they have left sitting in traditional bank checking and savings accounts earning little or nothing.

“The opportunity cost of zero interest checking didn’t really matter two years ago, whereas now you’re leaving decent yield and cash flow on the table by not moving cash around and being really opportunistic and thoughtful about it,” says Margaret Wright, a managing director and senior wealth advisor at Truist Wealth in Atlanta. “We’ve all been so yield starved,” she adds. “All of a sudden you see these percentages and people are excited.”

For some Millennials and Gen Zers, the idea that you can earn a return on cash likely comes as a surprise. The Federal Reserve cut interest rates dramatically during the 2008 recession and kept them low until 2015, raising them modestly through 2019. Then, when the Covid-19 pandemic hit in early 2020, the Fed brought rates back down to virtually zero. So for 14 years, there wasn’t much of a penalty for leaving the cash you weren’t ready to invest long term in FDIC insured deposit accounts.

“In my adult lifetime I haven’t seen a landscape where you can actually earn significant money on your cash,” says Julia Colantuono, a 31-year-old Certified Financial Planner who runs her own practice out of Westborough, Mass. “I remember my father telling me ‘oh, put your money in the bank and it will work for you.’ But that’s never been true in my adult life until now.”

The J.D. Power Financial Health & Advice Satisfaction Study reports that 29% of bank customers surveyed in February and March said they had moved deposits away from their primary banking institution in the past 90 days. Those 40 and under were the most footloose, with 38% reporting they had moved on average of 43% of their deposits. By contrast, just 23% of customers older than 40 had moved money, and they had shifted just 35% of their deposits.

“There’s definitely excitement with the Millennial generation that they can now actually start earning interest on cash money,” says 40-year-old Jonathan Kiehl, a CFP who runs his own financial planning firm out of Lancaster, Pa. “Some of these individuals have had tens of thousands sitting in cash accounts that have been earning nothing for the past several years.”

Since March 2022, the Fed has raised its target “federal funds” rate (the rate for overnight lending between U.S. banks) 10 times–from a range between 0% and .25% to a range of 5% to 5.25%. That’s the highest level since September 2007 and the fastest pace of increases since Fed Chairman Paul Volcker was fighting inflation way back in 1980.

All but 0.25% of that 5% percentage point increase came before the failure of Silicon Valley Bank this past March 10th. Yet the riveting drama—complete with a Twitter fed bank run – focused public attention on the reality that money can be moved quickly and easily, and that bank deposits that exceed the $250,000 guaranteed by the Federal Deposit Insurance Corp. aren’t necessarily risk free.

The big winner from that wake up call? Money market mutual funds. During six weeks after the SVB failure, Moody’s reports, commercial bank deposits decreased $399 billion, while money market fund assets increased $342 billion. “You really saw dramatic change after the bank failures started and people, both retail and institutional, turned smartly back to money market fund products,” Neal Epstein, a senior credit officer at Moody’s, says. “It’s a combination of safety and yield.”

According to the FDIC, as of mid-April, banks were paying an average annual interest rate of 0.06% on interest checking (many checking accounts don’t pay interest at all); 0.39% on traditional savings accounts; and 0.57% on money market savings accounts. By contrast, the 100 largest money market mutual funds now pay an average of 4.83% according to Crane Data.

Money market mutual funds hold high-quality, short-term debt, including U.S. Treasury bills, federal agency notes, municipal debt, repurchase agreements and commercial paper. (What they hold varies by type of money market fund.)

There are other ways, too, for those sitting with extra cash in the bank to earn higher rates. They can invest directly in short-term government debt—three-month Treasury bills are now yielding 5.2% and the interest isn’t subject to state income tax. Or they can go online to find FDIC insured high yield savings accounts and bank certificates of deposit.

Earning more yield on idle cash can be as simple as a few taps on your phone – last month, Apple announced it was partnering with Goldman Sachs to offer holders of the Apple credit card a savings account paying a 4.15% Annual Percentage Yield. In its first four days, the account attracted nearly $1 billion in deposits. Goldman’s seven-year-old consumer brand, Marcus, currently pays the same 4.15% APY to savers who sign up for its online only account directly. (As of the third quarter of 2022, Marcus held $110 billion in consumer deposits.)

When considering where to move your idle cash, liquidity is a key consideration. Both high yield bank savings accounts and money market mutual funds allow you to pull your money out whenever you want without penalty, while CDs, and Treasury bills and bonds are longer-term investments. (If you need your money early, you may take a financial hit.)

“The biggest thing to determine first is what are you using this money for? Is it day to day cash that you might need to pull out tomorrow? Or is it a set chunk in an emergency fund that you don’t intend to touch for the foreseeable future,” Colantuono says. “If you need the cash in the coming days then I would say to seek out a high yield savings account or even money market funds. If you are okay with letting the money sit there, then you might want to look at a CD or Treasury bills.”

Keep in mind that money market fund yields fluctuate along with short term interest rates. If the economy enters a recession and the Federal Reserve lowers its target federal funds rate, the funds’ yields will move down too. Somewhat longer-term investments (such as owning individual Treasury bonds or CDs) present an opportunity to lock-in today’s high interest rates.

“Considering that long term rates are looking about as good as they have been in a decade, I’m saying don’t forget to look at long term investment opportunities, safe investment opportunities, like bonds, to lock in that type of return so you’re not missing that opportunity if the pendulum swings in the other direction,” says James Osborn, founder of Envest Asset Management, in Connecticut.

Tempted to move some cash? Here’s a guide to your options.

MONEY MARKET MUTUAL FUNDS

Money market mutual funds–unlike high rate bank savings accounts–are not insured by the FDIC. And as the past several months have demonstrated, nothing is completely predictable or without risk. Sure, big depositors with more than $250,000 in SVB and in Signature Bank (which failed two days later) got all their money back. But that’s because federal regulators concluded that forcing depositors to take losses would present a systemic risk. In other words, it could set off a full-blown banking run and crisis. (The FDIC hasn’t, however, committed to covering all above-$250,000 deposits in all cases.)

Money market mutual funds, while not insured, do have an excellent track record for safety. But in the anything-can-happen category, investors might be concerned over whether, for example, the Washington standoff over raising the nation’s debt ceiling could have an unpredictable and sudden impact on the funds.

If skittish investors suddenly rush to withdraw their cash from a money fund, that fund might have to sell underlying treasuries before their maturity dates to meet withdrawal requests–and maybe sell them at a loss. Such scenarios create concern that money market funds might lose the ability to pay back investors dollar-for-dollar—that’s known in the industry as “breaking the buck.” Money market fund providers are not legally required to step in if their funds’ net asset value drops below $1, but the big fund companies have every incentive to make sure that investors don’t lose money in a fund investors assumed was safe.

“Big funds like Fidelity or Vanguard, if they were ever to break the buck it would be the end of their business, period,” says Dan Wiener, who has tracked Vanguard funds for decades and is chairman of Adviser Investments. “Nobody would want to work with them, nobody would want to invest with them. People would pull their money out so fast it would make your head spin.” Vanguard alone has waived $316 million in fees over the past 15 years to keep yields on its money market funds above zero, according to Wiener.

Money market funds geared to ordinary investors come in different varieties–some invest in U.S. Treasury securities; some also hold government agency debt; some hold municipal debt (the interest is exempt from federal tax and also state tax if you live in the state where the debt comes from); some (known as prime funds) hold mostly commercial debt. (It isn’t as clear cut as it might sound. For example, funds that identify themselves as Treasury funds can hold repurchase agreements collateralized by U.S. Treasury securities, as well as cash and Treasury securities. The interest they earn from repos, unlike Treasury interest, isn’t exempt from state tax.)

The largest money market mutual fund managers are all big names–the top five are Fidelity, JP Morgan Chase, Vanguard, Blackrock and Goldman Sachs, according to Crane. So which fund you use may depend on where you maintain your other investments and the kind of fund you are comfortable with (a prime fund might yield more, but is considered riskier than one that sticks to government debt).

Note that the brokers and mutual fund companies offering money market funds are generally members of the Securities Investor Protection Corp. The SIPC doesn’t protect you from loss on a particular investment or mutual fund. But if a broker goes under, an individual investor is covered for up to $500,000 of losses.

HIGH YIELD SAVINGS ACCOUNTS

Assuming the bank where you have your primary checking account is chintzy when it comes to paying interest, you can open an FDIC insured high rate savings account directly online with a specific bank (such as Marcus), or indirectly, through a “fintech” — fintechs typically aren’t banks themselves, but funnel your money to a bank partner.

Fintech pioneer Betterment, for example, offers (through its bank partners) a “cash reserve” account that currently pays 4.5% and is FDIC insured for up to $2 million (or $4 million for a joint account). A growing number of fintechs offer more than $250,000 in FDIC insurance by spreading your money around to different banks. That’s because the $250,000 FDIC insurance limit is applied separately to each depositor at each bank. (If you already have a hunk of money at any of the banks participating in a fintech’s program, you need to make sure that you don’t inadvertently exceed $250,000 at any one bank.)

Even Robinhood, best known for commission- free trading in individual stocks, has gotten into the high rates savings account act: customers who set up a $5 a month Robinhood Gold account, can get uninvested cash swept into an FDIC insured savings account currently paying 4.65%, through a list of affiliated banks that includes Goldman Sachs, Citibank and Wells Fargo. According to Robinhood, its current insurance of up to $1.5 million will increase to $2 million after June 1, as more banks join the program.

Even Fidelity, the leader in the money market mutual fund business, offers a bank option. Fidelity’s FDIC Insured Deposit Sweep program will spread brokerage customers’ idle cash to as many as 27 different banks, including Citibank and Goldman Sachs, to maximize insurance. But its FDIC insured sweep account currently pays only a 2.60% APY; alternatively, you can keep your spare cash in the (uninsured) Fidelity Government Money Market with a current yield of 4.73%.

In addition to rate, pay attention to how easy it is to get to your money. Some high rate bank money market accounts allow you to access your cash through a debit card or checks. At Marcus, by contrast, you’ll have to first transfer any money you want to spend to your checking account; while the transfer is easy to do online, you’ll have to wait a few days for the funds to be available in your checking account.

Another option for those seeking both yield and FDIC insurance: MaxMyInterest will help you spread up to $5 million into accounts it says now pay an average of 5.10%. For that service, it charges 0.04% per quarter, which works out to $40 per quarter for every $100,000 held in a MaxMyInterest account. (There’s a minimum charge of $20 every 3 months.)

CERTIFICATES OF DEPOSIT

If you won’t need a chunk of cash for some period, you can lock in a decent return with an FDIC insured certificate of deposit. One easy way to shop for competitive CD rates is to use an investment account to buy brokered CDs. The idea is you’ll hold them until maturity, but you can sell them earlier if need be. (If interest rates rise, you’ll take a haircut on that sale.)

As of the end of last week, for example, Vanguard customers could buy CDs for three months to five years carrying APYs of around 5%. Institutions offering these rates ranged from Bank of China New York (three months, at an APY of 5.15%) to Morgan Stanley Bank N.A. (two years at 4.9%) to a five year CD paying 5% from BMO Harris Bank. Watch out, particularly with longer maturities, for an indication the CD is “callable”—that means that if interest rates fall, the bank can redeem the CD early after a specified date, which could defeat the point of you locking in a high rate for longer. That five year CD from BMO Harris? It’s callable this coming November.

You can also also search online for the highest CD rates at Forbes Advisor and similar sites–typically these aren’t being offered by the biggest banks, but they’re all FDIC insured.

TREASURY BILLS

You can buy Treasury bills with terms lasting between four and 52 weeks directly from the federal government by setting up an account at TreasuryDirect.gov. (While it’s a clunky site compared to commercial offerings, you’ll need a TreasuryDirect account if you want to buy Uncle Sam’s I-bonds, which are a longer term hedge against inflation.)

T-bills don’t actually send you an interest payment. Instead, you buy them at a discount to the face value and then get back the face value at maturity—the discount is your interest. You can put in an order for as little as $100 worth of bills at TreasuryDirect. Technically you’re buying through an auction process. But when you buy through TreasuryDirect, you’re actually agreeing to accept whatever rate is set at an auction–in other words, you’re not bidding competitively.

You can also buy T-bills through your bank or broker. Fintech Public.com offers a Treasury bill account with a current 5.1% yield and a feature that automatically reinvests customers’ treasury bills at maturity. The account is offered through a partnership with Jiko Securities, a member of the SIPC.

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