Investors who are camped out in cash are nabbing sweet yields, but the clock is ticking on that attractive income. Money market fund assets totaled $6.14 trillion as of the week ended July 24, according to the Investment Company Institute . And who could blame investors for socking cash away in these accounts? The largest money market funds are offering an annualized 7-day current yield of 5.12%, per the Crane 100 Money Fund Index. The bad news is that fed funds futures trading data suggests a 100% likelihood that the Federal Reserve will ease on rate policy in September, according to the CME FedWatch tool . When that happens, yields on cash will tumble. Financial advisors and money managers have been recommending that investors add exposure to duration – that is, longer-dated bonds with more price sensitivity to rate fluctuations – through municipal bonds and other issues . This way, they lock in today’s higher yields and benefit from price appreciation, as bond prices and yields move inversely to each other. However, not everyone is ready to commit to issues with longer maturities, so an incremental step toward adding duration might be moving some cash into short-dated bonds. “A considerable portion of money market investors could feel the time is right to incrementally take on risk – but in a manner that doesn’t fully abandon their guarded mindset,” wrote Daniel Siluk, head of global short duration and liquidity at Janus Henderson, in a report earlier this month. “For those prioritizing low volatility, visibility, and a degree of capital appreciation not available within money markets, we believe a logical destination along the risk spectrum will be fixed income,” he said, “namely the front end of the yield curve and the higher quality corporate credits that reside there.” Dipping a toe into duration Looking out to mid-2025, UBS’ head of credit strategy Matthew Mish sees total returns of 7.1% for investment grade bonds with maturities of seven to 10 years, while money market funds will see returns of about 4.8%. But even adding exposure to bonds with one- to three-year maturities can offer an advantage over cash, Siluk said. They offer yields with less interest rate risk compared to longer-dated instruments – and they can still see some degree of capital appreciation amid falling rates. “Investors must also remember that the liquid securities held in money market funds have maturities capped at slightly over a year,” he said. “Should rates fall, the attractive yields of this year won’t carry into the next.” “In contrast, exposure to bonds with durations between one and three years will result in today’s yields proving more durable should the securities be held through maturity,” Siluk added. Investors dipping a toe into these short-dated bonds should aim for quality, going for investment-grade issues instead of digging into high yield, he said. A combo of yield and price appreciation Investors may consider exchange traded funds that offer them exposure to a basket of short-term bonds. Just be mindful of the credit quality of the underlying issues and the fees, as higher fund expenses erode returns over time. The Vanguard Short-Term Corporate Bond ETF (VCSH) has a 30-day SEC yield of 5.1% and an expense ratio of 0.04%. The fund skews heavily toward investment grade holdings, with 45.2% of its allocation earmarked for BBB-rated issues and 46.9% held in A-rated bonds. There is also the iShares Short Treasury Bond ETF (SHV) , which has a total expense ratio of 0.15% and 30-day SEC yield of 5.12%. While these short-term bonds may be an attractive alternative to hiding out in cash, investors should avoid making them the lion’s share of their fixed income holdings. That’s because even as those yields may not fall as quickly as the yields on cash, they will indeed come down in a falling rate environment and that could affect a portfolio’s ability to generate income in the long run. A diversified portfolio would include exposure to a range of maturities along the yield curve, allowing investors to capture income and price appreciation, while offsetting the volatility in stocks.
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