When cash isn’t king: The case for longer-term bonds

When cash isn’t king: The case for longer-term bonds

With cash providing attractive yields, an investor could be tempted to remain in cash instead of shifting back into the bond market.

In the chart below, we look at the 2-year forward annualized returns for the aggregate bond market and cash following the past four instances of a yield curve inversion over the last two decades. The chart demonstrates that in each instance, an investor would have fared better investing in the aggregate bond market than cash.

Bonds have outperformed cash following yield curve inversions

Private and temporary employment growth

A yield curve inversion occurs when 3-month Treasury yields are higher than 10-year Treasury yields.

Source: Morningstar. The start date of each 2-year period is the day after the instance of a yield curve inversion in which 3-month US Treasury bills yielded higher than 10-year US Treasury bonds. Asset classes are represented as follows: Bonds – Bloomberg US Aggregate Index; Cash – Morningstar Money Market – Taxable Category.

What this means for investors

During yield curve inversions, investors may opt to stay in cash given the attractive yields. However, history shows us that shifting into the bond market at times of higher short-term yields may generate greater forward returns. Core-plus bond funds seek to outperform the Bloomberg US Aggregate Index and may be an appropriate option for investors looking to move out of cash.


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Past performance does not guarantee future results.

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The views expressed represent the investment team’s assessment of the market environment as of September 2023, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

Chart is for illustrative purposes and is not representative of the performance of any specific investment.

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Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer's ability to make interest and principal payments on its debt. This includes prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds. The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult to obtain precise valuations of the high yield securities.

The Bloomberg US Aggregate Index is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

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