Rising interest rates making you wonder whether to invest extra money or keep it in cash? For some, holding cash may be short-sighted. When interest rates change, they don’t often do so uniformly across the curve. The current rate hike cycle illustrates this quite well, given the speed. The federal funds rate is the shortest of short-term interest rates.
It’s the reference interest rate for overnight borrowing between financial institutions like banks. So when the federal funds rate goes up, it can have an outsized impact on shorter term interest rates on assets like Treasury bills (T-bills).
When interest rates change, they don’t often do so uniformly across the yield curve. In the chart above, it’s worth noting that the 1-month T-bill rate is being distorted by the debt ceiling talks. To help investors compare cash and equivalents, interest rates (or yields) are usually in annualized terms. For example, the annual percentage yield (APY) in a savings account, say 4.5%, assumes the current interest rate stays the same for a year and future interest payments are added to the balance and compounded. On a monthly basis, for simplicity, let’s assume this equates to an interest rate of
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