At current levels, interest rates on purchased money market funds are hovering around 5%. As many income-oriented investors have grown increasingly comfortable holding high levels of cash at these rates, now is the time to evaluate how much cash is appropriate to hold in your overall portfolio mix. Our base case scenario is for rates to remain near current levels for the remainder of the year. However, history suggests the next direction of rates is down.
Interest received from cash and cash equivalent holdings such as money market funds and Treasury bills is determined from short-term interest rates. If rates fall, the reinvestment of future cash holdings will result in lower interest income. For example, if you hold a Treasury Bill that matures on June 30, 2024 and rates are hypothetically at 4%, the Treasury Bill available at that point in time for purchase will have a lower interest rate.
What are your options? After identifying and holding aside cash for an emergency fund (at least 3 months of expenses, our preference is 6-12 months) and any known cash needs for the next year, our recommendation is deploying the funds to your investment portfolio. For balanced investors, that would likely include an increased allocation to bonds and stocks. Over the last 6 months, we have been increasing bond exposure across suitable accounts. Importantly, for the increased allocation to bonds, we have also been extending the maturity of the underlying holdings. The reason for this is to purchase bonds with maturity dates further in the future to hold the higher interest rates for a longer period of time under the assumption that short-term interest rates are likely to come down in the next 12 months.
J.P. Morgan’s Bob Michele, Head of their Global Fixed Income, Currency & Commodities group, expanded on this idea on a recent Bloomberg interview that can be viewed here: (https://youtu.be/f9J9LF6SjG4).
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This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.