As the Federal Reserve embarks on a rate-cutting spree, investors are facing a challenging landscape that requires reassessment of traditional cash holdings. With money market fund yields taking a downturn and a staggering amount of cash sitting idle in the market, it’s imperative to explore alternative investment options to safeguard and potentially grow capital during this turbulent financial period.
Recent statistics reveal that assets in money market funds have reached a staggering $6.47 trillion, according to the Investment Company Institute. However, the annualized seven-day yield reported in the Crane 100 Money Fund Index has dipped to 4.69% as of mid-October 2023, marking a significant decline from the over 5.1% yields observed in late July. This downward trend in yields signifies the broader implications of the Fed’s ongoing interest rate decrease, prompting a reevaluation of where investors can find rewarding returns on their cash.
Brett Sheely, head of ETF specialists at AllianceBernstein, highlights the ongoing shift in investor sentiment: “There’s $6 trillion in cash right now, and investors want the next step out of cash.” This scenario begs the question—where should investors redirect their idle cash to remain both safe and yield-generating?
In light of diminishing money market returns, short and ultra-short duration bond funds emerge as viable alternatives for investors looking to strike a balance between yield and risk. Duration, a crucial concept in bond investing, measures sensitivity to interest rate fluctuations; bonds with longer maturities illustrate greater price volatility.
Financial advisors are emphasizing a strategic approach by suggesting an allocation to “intermediate” duration assets, which entail holding bonds with average maturities of around six years. This strategy facilitates capitalizing on the price appreciation potential as bond yields and prices generally inversely correlate. However, for cash that may be needed within the next 12 months, shorter duration options become more appealing as they minimize exposure to volatile interest rate shifts while improving yield over traditional cash holdings.
Matthew Bartolini, managing director at State Street Global Advisors, emphasizes this strategy by asking, “How can you earn relatively high yields while minimizing risk?” For those with a penchant for slightly increased yields over cash deposits, ultra-short funds with durations of one to three years can serve as stabilizing forces.
Investors seeking specific fund options might consider Vanguard’s Ultra-Short Bond ETF (VUSB), boasting a mere 0.1% expense ratio and a 30-day yield of 3.54%, or AllianceBernstein’s Ultra Short Income Fund, offering a competitive yield of 4.81% with a slightly higher expense ratio of 0.25%. Tax-minded individuals might also find short-duration municipal bonds appealing, especially given their tax-exempt nature compared to taxable corporate bond yields.
For those averse to the risks potentially associated with short-duration bond funds, traditional banking solutions such as certificates of deposit (CDs) and high-yield savings accounts continue to be viable, steady alternatives. Although top yields on one-year CDs, such as those offered by Bread Financial, have fallen from a notable 5.25% to 4.3%, they still provide a degree of security while generating interest. Analysts predict that as online banks adjust to competition, further declines in savings rates may be on the horizon.
Additionally, CDs and high-yield savings accounts enjoy the safety net of federal deposit insurance, which secures funds up to $250,000, thereby offering peace of mind amidst the current uncertain investment environment.
Moreover, Treasury bills (T-bills), backed by the U.S. government, present another safe haven for investors. These T-bills not only ensure the protection of principal, but also offer interest exempt from state and local taxes—making them especially attractive for those in high-tax jurisdictions.
As the Federal Reserve continues to fine-tune interest rates, the investment community must adapt accordingly. With the decline of money market fund yields weighing on traditional cash holdings, it becomes essential for investors to explore short and ultra-short bond funds or traditional savings vehicles like CDs and government bonds. By thoughtfully navigating these options, investors can effectively position themselves for income generation while balancing risk in an evolving financial landscape.