Source: MorningstarDirect, Bloomberg, UBS, as of 23 August 2023.(UBS)

The Bloomberg US Government Bond Index is down about 16% from its last all-time high, set in July 2020. This is already the longest that it has ever taken for the bond market to recover its losses, and yet it has only rallied about 3% from its recent low.

Today, it is possible to earn a higher yield in cash and savings than in short-term bonds, and short-term bonds are yielding more than long-term bonds—a phenomenon known as an “inverted yield curve.” High yield savings accounts are offering a yield of about 5.4%, the 2-year Treasury yield is 5%, and the 10-year Treasury yields 4.2%.

Despite this backdrop, we do not recommend that long-term investors pile into the highest yielding part of the yield curve. Inverted yield curves are a common feature of market cycles, and they are usually (eventually) followed by a recession. Typically, inverted yield curves are resolved when interest rates fall (and, as short-term interest rates fall more quickly than longer-term interest rates, the yield curve usually goes back to being upward sloping). See the chart above of 5-year returns for cash and US government bonds to see what an inverted yield curve means for future cash and bond returns.

US government bonds have outperformed cash in 83% of 5-year periods since 1925. If we look at all 5-year periods since January 1977, US government bonds have outperformed in about 90% of all 5-year periods, and in 97% of 5-year periods where the yield curve was inverted at the beginning of the 5-year period.*


Short-term interest rates will not stay at these elevated levels forever, and when they fall this will create a tailwind for bonds (boosting their prices due to duration risk), and a headwind for cash and savings accounts (whose yields will shrink without any offsetting price appreciation).

Therefore, if investors have spending needs in the next couple of years, cash and savings accounts are a good resource (as a part of a broader Liquidity strategy). For the portion of a portfolio that will stay invested for at least 3-5 years, history suggests investors will be better off keeping a core allocation to bonds rather than replacing it with cash.

*January 1977 is the earliest we could find data for yield-curve inversions using the spread between 2-year Treasuries and 10-year Treasuries

Main contributors: Justin Waring, Investment Strategist; Leslie Falconio, Head of Taxable Fixed Income Strategy

See the original report, Bonds over cash for the long run , 25 August, 2023.