While money markets and certificates of deposit are still producing solid yields, sitting in too much cash could be costing investors money. Investors have piled into cash equivalent assets in recent years — and they have stayed despite the central bank’s decision to cut the federal funds rate three times last year. The Fed’s last decrease was in December and it’s now on hold as it watches economic data and the impact of the Iran war. “In an environment where cash has grown both tactically and structurally, the opportunity cost of remaining sidelined could be rising,” BlackRock warned in a report last week. Money market fund assets were at $7.63 trillion as of the week ended April 29, according to the Investment Company Institute . In prior rate-cutting cycles, the one-year average return on cash after cuts began following a pause of three months or longer was about 2.8%, a BlackRock analysis showed. The firm used the Bloomberg US T-Bills 1-3 Month Index to represent cash. In contrast, bonds have historically delivered 7% to 9% over the same period, BlackRock noted. Even as recent events have made it difficult to predict how the Fed could proceed on rates – and a trio of central bank officials recently disagreed with hinting that the next move could be a cut – BlackRock is telling investors they should at least hedge their bets. “The consensus trade right now is very much settling in on higher for longer, even potentially pivoting to more of a restrictive mode in Fed policy,” Stephen Laipply, global co-head of iShares Fixed Income ETFs, said in an interview with CNBC. “The risk there is that if things quickly resolve, albeit unexpectedly, in terms of the geopolitical risk… you may have a reversal on that,” he added. “As usual, by the time you may want to act on that by extending duration, even if it’s modest, rates could have already moved and repriced a different trajectory for Fed policy.” Overall, the majority of traders are not pricing in a cut at all this year, according to the CME FedWatch tool . Roughly 16% see odds of rates rising at the end of 2026, while almost 12% anticipate easing. “[W]e think the market continues to overprice the risk that central banks like the Fed will hike, or not cut, interest rates,” UBS said in a note last week. “That presents an opportunity for investors to lock in yields by adding to quality bonds, particularly in the short- and medium duration segment.” Wells Fargo Investment Institute is also telling income investors they should move excess cash into bonds. “Intermediate-term bonds are going to obviously outperform cash if you believe the Fed still cuts one or two more times in the next one or three years,” said Luis Alvarado, the firm’s co-head of global fixed income strategy. “While we park money and wait, you’re still getting paid a nice coupon in fixed income to do that.” The risk is that inflation is much higher than expected, which forces the Fed to raise rates, he added. Yet Alvarado sees more probably of a hold for now as events play out. “We don’t think that the price of energy will stay at these levels forever,” he said. “We’re still at an impasse now, but we don’t think it’s going to be sustainable when we look over the next three to five years.” Where to move excess cash Investors should focus on bonds with maturities of three to seven years, although in this environment even one to three years should be fine as the Fed continues to keep rates steady, Alvarado said. He’s sticking with high-quality bonds, like mortgage-backed securities and investment-grade corporate bonds . For investors in high tax brackets, Alvarado also sees opportunities in municipal bonds, which have yields around 3.68%, he said. That converts to a taxable equivalent yield of about 5.84%, he added. That is a very high starting yield that you can sustain for a longer period of time if you are a buy-and-hold investor in municipal bonds, he said. BlackRock also strongly believes in high-quality fixed income in the belly of the curve, or about one to five or seven years. That could be in investment-grade corporates or a multi-sector income fund, like the iShares Short Duration Bond Active ETF (NEAR) , Laipply said. The fund, which has an effective duration of 2.14 years, has a 30-day SEC yield of 4.26% and an expense ratio of 0.25%. NEAR YTD mountain iShares Short Duration Bond Active ETF year to date For those who would prefer not extending duration, they can consider floating-rate assets like collateralized loan obligations, he noted. “We’re still very convinced that this is just a really powerful opportunity in fixed income,” Laipply said. “There’s a lot of volatility right now. There’s a lot of geopolitical risk, but I think the flows themselves are showing you that investors are looking past that.”
