poke0003 t1_j6j5vte wrote

I think we are just talking past each other. I feel like I’m reading your points, they all agree with everything both of us are saying, and yet somehow they are presented as responses to my comment as if we are not in agreement.

It could be that I’m just not hearing it clearly over the deafening applause. ;)

ETA: 259 comes from 5.89% (589 bps) - 3.3% (330 bps) = 2.59% (259 bps). Likewise, 89 bps came from just the difference between 5.89% and the top end estimate of 5.00%.

No assumptions have been made about whether the higher yield vehicle is a savings account, only that it is not a US savings account at a bank (I.e. FDIC insured).

Savings account that we normally think of with banks are pretty low risk (and in the US, which is not what commenter in invested in, don’t yield 5.89%). It is specifically the safety of savings accounts that lead them not to yield 5.89% (in the us, for usd investments) currently. If you could get a true equivalent investment across currencies with all the safety of a US savings account that DID yield 5.89%, that would attract a lot of investment, which likely would drive down the rate due to the high demand. Alternatively, it might not attract investment because it isn’t equivalent (currency conversion costs, access issues, risk differences, etc).

While percentages are independent of currency, one reason a vehicle could provide more return is because of the currency. USD is a highly fungible and useful currency with a strong history of stability and operates as the global reserve currency. Russian rubles are extremely difficult to spend, so an investment opportunity in Russian rubles would need to provide a much higher rate of return than an equivalent opportunity in USD. Getting 100% returns restricted to rubles is, for most people, probably not as attractive as getting 3.3% in a US savings account. As a result, we wouldn’t just say that the 100% yield is better - currency matters. To relate it to your example, if the value of bottle caps was highly volatile relative to USD, such that 100 bottle caps is 100 USD last week, 50 USD this week, and maybe 150 USD next week, you would need additional return on your bottle cap investment that would cover the cost of hedging against USD / bottle cap fluctuations to have the return be comparable to a USD denominated vehicle. A more real world example might be if you had a crypto denominated savings account.

Finally, the comment that started this specifically referenced getting 3-5% returns in a savings account for someone living in NYC (and paying rent in USD). Hence all the context about USD and US savings accounts. Skepticism is being expressed that a cash equivalent investment that can be converted to USD to pay rent with the safety of a US savings account would really return 5.89%. That sounds suspiciously high. The theory proposed is that some combination of currency exposure risk, default risk, liquidity risk, or other risk that is greater than a IS Savings account is driving the yield up that high.


poke0003 t1_j6iy8ud wrote

All investment is risk based - that’s why the basis for comparison is the risk free rate of return (which is really conceptual but commonly US T-Notes and T-Bills are used). Since FDIC insured account are extremely low risk, they have lower return. If there is a competing yield 259 bps higher (or even 89 bps higher), it presumably comes with either greater risk or maybe is not a similar cash equivalent investment. Certainly one difference is that it could be denominated in a less desirable/useful currency than USD. It could also be that the non-US account they have it in lacks protection equivalent to FDIC insurance (so more risk).

Again though, the key factor is that not all yields are directly comparable. No financial institution gives away a free 289 bps with zero strings attached. If your non-us SA gets 5.89%, it is very likely that either currency differences or risk exposure or both are why. This is different from comparing the rate across competing US HYSA, which I believe is what was being questioned.

So to recap:

  1. we all agree commenter is not using us savings accounts.
  2. at least I am proposing that they are getting 5.89% on their money because their instruments are not equivalent to US savings accounts.
  3. investing your year of rent money in assets materially riskier than HYSA is a choice one could make, but doesn’t really seem in the spirit of the original comments.

This concludes my TED talk.

<Wild applause from the gallery>


poke0003 t1_j6iqd53 wrote

I assume it isn’t a hysa, but the original context of the comment was “putting the money in a savings account” and this return was being directly compared to HYSA returns. So yeah, maybe a brokerage account is averaging better, but that would be an odd thing to bring into that conversation.

The point, however, is that you cannot just look at yield and say it is all the same - risk based return colors raw yield numbers.

Edit: Also - this is specifically referencing cash equivalent investments, which further colors that return as unusually high in the context of comparison to a 3.3% U.S. HYSA yield.


poke0003 t1_j6i8bf4 wrote

Ignoring any currency factors, 5.89% is not, in fact, 5.89%. A US HYSA comes with FDIC insurance. While it is possible I (and everyone else) is just not familiar with the instruments you are using, it seems extremely unlikely that you could get 5.89% yield with the same risk as a HYSA.