Fixed Income What should I do with my cash holdings?

CIO advises investors to progressively lock in attractive yields in high-quality fixed income. Over the long term, balanced portfolios have historically outperformed deposits over most time horizons.

Cash deposits have become more appealing to many investors as central banks tightened policy.

• In the US, the federal funds rate target range now stands at 5.25–5.5%, while the 2-year Treasury yield was 4.8% as of 7 August.
• In the Eurozone, the deposit rate stands at 3.75%, compared with a 2-year German Bund yield of 3.16%.
• Cash at the bank may seem like a refuge in an uncertain economic environment.

But this appeal is superficial, and we favor locking in yields and sticking with a diversified portfolio.

• Both the Fed and ECB signaled that an end to rate rises was now likely near.
• Attractive yields on bonds can be locked in, providing the added benefit of diversification and the potential for capital gains if economies head into recession.
• A balanced portfolio of equities and bonds has historically outperformed cash over most time horizons—with a 60/40 portfolio beating cash around 80% of the time over a five-year period.

So, investors should avoid adding excessively to deposits and favor bonds.

• We think investors shouldn’t wait for central banks to confirm an end to the rate hiking cycle before looking for opportunities to lock in attractive yields.
• We expect high grade (government), investment grade, and sustainable debt to deliver good returns over the balance of the year, and we prefer five to 10-year maturities.
• Senior bank bonds continue to offer higher yields compared to those of similarly rated nonfinancial companies.

Did you know?

• Inflation has reliably eroded the real value of cash deposits, with a 21% decline in purchasing power for euros since 2007, 23%for US dollars, and 25% for sterling.
• A 60/40 portfolio of US large-cap securities and bonds beat cash around 80% of the time over a five-year period, based on data going back to 1926.
• The European Central Bank delivered its ninth consecutive rate hike in July, raising its benchmark deposit rate by 25 basis points to 3.75%. That equaled an all-time high last reached in 2000. But the ECB dropped explicit guidance that rates would need to rise further, signaling instead that further tightening would hinge on whether economic data suggested this was necessary.

Investment view

We see a good opportunity to lock in elevated rates. We see opportunities in high grade (government), investment grade, and sustainable bonds, and select senior financial debt. Actively managed fixed income strategies can help investors take advantage of the breadth of opportunity.

Main contributors - Vincent Heaney, Christopher Swann

Original report - What should I do with my cash holdings?, 7 August 2023.