CIO thinks investors should reevaluate their cash holdings, ensure they are sufficiently invested and diversified for the long term, and take the opportunity to lock in attractive yields in quality fixed income. (UBS)

CIO advises investors to progressively optimize yields on cash holdings, while attractive rates are still available. 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 5.11% as of 2 October.
  • In the Eurozone, the deposit rate stands at 4%, compared with a 2-year German Bund yield of 3.22%.

But with policy rates likely peaking, such elevated deposit rates may not last too long.

  • Both the Fed and the ECB have signaled that an end to rate rises is now likely near.
  • Attractive yields on bonds can be locked in, providing the added benefit of diversification and the potential for capital gains if economic growth slows more sharply than expected.
  • 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 consider strategies to optimize yields on cash holdings, while attractive interest rates are still available.

  • A combination of fixed term deposits, a bond ladder, and select structured investment strategies can help optimize yields while balancing counterparty, interest rate, credit, and liquidity risks.
  • We believe assets in excess of 2–5 years of expected withdrawals should be invested in a diversified range of longer-duration financial assets.
  • Investors can also consider borrowing as a means of meeting liquidity needs while remaining invested—albeit mindful of the risks and as part of a financial plan.

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 tenth consecutive rate hike in September, raising its benchmark deposit rate by 25 basis points to a record high of 4%. But policymakers indicated that “key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

Investment view

Cash rates are attractive. But we expect such high rates to be short-lived as the central bank tightening cycle ends. Investors can optimize and future-proof yields by using a combination of certificates of deposit, bond ladders, and select structured solutions.

Main contributors - Vincent Heaney, Christopher Swann, Matthew Carter

Original report - What should I do with my cash holdings?, 3 October 2023.