Putting Cash to Work

Cash has been king for much of the past few years and aggregate Money Market holdings recently hit a record high just north of $6.4 Trillion according to Federal Reserve Economic Data (FRED). Investors collectively now sit on significantly more cash than they did just 12 or 24 months ago and who can blame them in an environment where a relatively lower risk 5% return has been readily achievable?

However, the times they are a changing! While true that Cash yields remain attractive today, it is important to remember they adjust rapidly to changes in short-term interest rates. The yield you see on your Money Market fund or savings account may not be the same a few months from now. Interest rates have likely already peaked for this cycle and the market has priced in a high probability of a rate cut at the September Fed meeting. Futures pricing implies expectations for over 2% worth of rate cuts by August of 2025!

A strong cash position may be appropriate to meet planned expenditures, retirement withdrawals, or just to help sleep better at night, but we suspect many of our clients are sitting on cash levels that exceed those requirements. Holding a large portion of funds in cash or cash equivalents is not necessarily a conservative strategy when factoring in inflation trends, available alternatives, and potential future rate cuts.

With a lower interest rate backdrop likely ahead, now may be a great time to consider “locking in” some of the attractive longer-term yields available in the Corporate and Municipal bond markets. Consider that earning 5% yields for a few months is unlikely to adequately compensate investors for the potential risk of many years stuck with future yields in the 3% range. One need only look back just a few years into the past to find nearly a decade-long period where Money Market yields were half of what they are today.

We would also highlight the strong historical correlation between starting bond yields and subsequent 7 to 10-year bond returns. Coming out of the longest bear market for bonds since Andrew Jackson was in office, the prospect of resetting a Fixed Income portfolio with starting yields now in the 4% to 5.5% range is rather compelling!

Any allocation or liquidity deployment decisions are nuanced and should be tailored to everyone’s specific financial situation. We do not provide blanket advice, and instead stand ready to lead personalized discussions at any time to help ensure portfolios remain properly allocated in service of your long-term financial goals.  If you are interested in discussing your overall cash allocation and would like to explore fixed income opportunities, please use the link below to schedule a meeting with us or give us a call.

We thank you for your continued trust in our team, and very much look forward to hearing from you soon!

Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Past performance is not a guarantee of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification.

Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.