Over the last several months I’ve touched on how to raise your cash management yield in an environment of super-low interest rates. Short-term rates are currently at their lowest levels since the 1950s causing a conundrum for income investors.

With money-market funds yielding about 0.5% and overseas dollar accounts paying barely 0.20% in annual interest, there’s certainly a better alternative to pitifully low or no yields.

Until the emergence of the credit crisis almost two years ago investors didn’t really concern themselves with cash management strategies. Interest rates on short-term bonds and money-market funds hovered north of 4% and the financial system was functioning. Offshore, a depositor could earn just under 5% in U.S. dollars and about 4% in euro.



Of course, the world has turned upside down since August 2007 and especially since the global crash last September and October. The Fed has sliced interest rates effectively to 0% and other central banks are not far from that target, including the European Central Bank. In almost every currency today investors are struggling to find a decent and safe yield to park their precious liquidity.

Deflation is the primary threat to the financial system as debt destruction spreads mainly to mature economy markets, threatening the viability of the banking system. Though most governments now stand behind their largest banks and will provide either blanket deposit coverage or full rescues in the event of a collapse, investors are rightly concerned about how to place their liquidity.

In the United States, investors can boost their effective yield by almost 100% by adding two-year Treasury bonds. These short-term notes have seen their respective yields rise from 0.76% on December 31 to 0.90% now. The two-year note is highly liquid, safe and, unlike a money-market fund, you won’t have to pay a management fee. Even better, short-term Treasury bonds now trade slightly below par, which guarantees you’ll lock-in your principle while making a small capital gain to boot even if bond prices decline further.

If you’re worried about inflation over the next 36 months – a real concern amid an avalanche of global government printing – consider a 5-year TIPS, or Treasury Inflation-Protected Securities. A five-year TIPS pays 0.92% plus any inflation over and above that rate. Instead of Treasury bonds beyond two years, TIPS offer far superior value than conventional Treasury securities because of the inflation protection.

If you’re offshore, boost your effective yield the same way by purchasing U.S. 2-year Treasury bonds or short-term bonds issued by the European Investment Bank (EIB), rated AAA. The EIB issues short and longer dated bonds in many major currencies.

Also, look at high quality short-term investment grade corporate bonds. Many of the biggest and safest non-financial sector bonds have already rallied since last fall and mostly trade above par value. But there are some exceptions.

For example, Nestlé, the world’s largest food company based in Switzerland, has a series of bonds denominated in major currencies, including dollars. The Nestle Holdings January 2013 bond pays an effective yield of about 2.5% or about 0.67% more than T-bonds. As far as I’m concerned, I have more faith in Nestlé’s cash-flow than most sovereign governments. Nestlé has gross revenues of more than $200 million every day.

Another interesting opportunity for cash management lies in the fixed-income securities issued by some of the world’s largest oil companies. Energy companies have huge cash reserves – many have more net cash than many governments! If you subscribe to the long-term view that Peak Oil will continue to pressure oil prices once this recession/depression concludes then bonds issued by these goliaths make good investment sense. Just be sure to keep your maturities under five years.

Finally, I also like short-term senior Canadian bank debt. The Canadian financial system is far stronger than most G10 countries since regulators didn’t allow mergers or takeovers and banks largely avoided crippling losses tied to mortgage-backed garbage. Not a single Canadian bank has been bailed out or received government assistance. Short-term high quality Canadian bank debt yields about 5% and most issues trade near or below par value.

To be sure, ultra-low interest rates suggest depositors will have to take some extra risk to capture higher coupons. There’s no FDIC deposit protection outside of the auspices of a bank savings account. Yet this strategy doesn’t have to be risky at all if you diversify your cash management portfolio across several sectors and maturities while sticking only to high quality investment-grade paper.