Bonds Take Center Stage
From: Amundi Asset Management
Short-term bonds may dominate cash in the next phase of monetary policy
• With yields on cash currently elevated, we appreciate why cash allocations have swelled.
• However, as the US Federal Reserve considers pivoting its stance, so too should investors.
• Against the interest rate risk inherent in most fixed income securities, investors should consider the reinvestment risk inherent in cash.
• Shifting exposure from cash to short-term bonds may allow investors to “lock in” much of today’s elevated income levels while also positioning their portfolios for price upside.
Periods of elevated cash rates have historically been short-lived
Savers have been earning a reasonable return in cash for the better part of the last year. But how long can these compelling cash rates last? Historically, the answer has been: not very long. In every rate hike cycle since the 1970s, the US Federal Reserve has “paused at the peak” federal funds rate for a matter of months, not years. Six months have now passed since the Fed last raised interest rates in July 2023. History suggests the rate cuts could begin soon. Furthermore, once the Fed starts cutting its policy rate, cash rates could move hundreds of basis points lower in a very short period of time. These two historical facts – the “pause at the peak” tends to be short, and the “fall from the peak” tends to be precipitous – suggest the glory days for cash allocations may be numbered. Rotating from cash into short-term bonds can help investors reduce this reinvestment risk without taking on the full price volatility inherent in longer-duration fixed income exposures.
