One of the hardest tasks for investors over the last several months is where to put cash and cash equivalents in an almost zero interest rate environment. Combined with the rising threat of bank failures in the United States and Europe, investors are rightly concerned about cash-management amid a credit deflation.

Money market funds, which now yield just 0.5%, continue to witness a compression in yields as short-term yields plunge to match the official Federal Funds rate, effectively at 0%. And Treasury bonds, heavily overbought in this safe-haven crisis environment, provide paltry yields and have grown riskier lately as the government launches a bull market in new Treasury issuance to fund monster-sized bailouts and spending packages.

Overseas, the crash in Eastern and Central European markets has pounded the already distressed banking sector in Western Europe, particularly Swedish, Austrian, Italian and German banks whose exposure to the region is significant. For example, the equivalent of over 75% of Austria’s annual gross domestic product (GDP) has been loaned to neighbors in the region.

Since October, European Union (EU) governments have provided an unofficial blanket guarantee for all deposits until 2011. If you have cash deposits at a European Union bank then those assets are covered. Still, a safer alternative is to park that liquidity in six-month T-bills or equivalent in euro. By executing this strategy you remove on balance sheet risk should that bank fail; marketable securities, on the other hand, are considered off balance sheet and cannot be seized by a bank’s creditors.

Now, in its 19th month, the global financial crisis has wiped-out more than $25 trillion dollars of wealth since October 2007 and continues to bleed portfolios in 2009. With February about to conclude today, the MSCI World Index is down 18% this year while the S&P 500 Index has tanked another 15%. This month will be the second worst February in U.S. stock market history.

In the United States, cash management should include spreading your bank deposits among two or three institutions, including J.P. Morgan, Wells Fargo and perhaps a local bank that is small yet profitable. Money market funds should be sold and reinvested in Treasury-designated money market funds such as those offered by low-cost leader, Vanguard Funds. Short-term Treasury bonds are also a safer option; keep you duration no more than three years.

Have a good weekend. See you on Monday.