Welcome to Extreme Investor Network, where we provide unique and valuable insights into the world of investing. Today, we will discuss the current state of money market funds and why investors may want to consider moving some cash into short-term bonds.
As of the week ended July 24, money market fund assets totaled a whopping $6.14 trillion, offering investors an annualized 7-day current yield of 5.12%. However, with the Federal Reserve likely to ease on rate policy in September, these yields are expected to decrease. This is prompting financial advisors and money managers to recommend adding exposure to longer-dated bonds through municipal bonds and other issues.
For investors who may not be ready to commit to longer maturities, an incremental step towards adding duration could be moving cash into short-dated bonds. These bonds offer yields with less interest rate risk compared to longer-dated instruments and can still see some degree of capital appreciation amid falling rates.
When looking out to mid-2025, experts predict total returns of 7.1% for investment-grade bonds with maturities of seven to 10 years, compared to 4.8% returns for money market funds. Even bonds with one- to three-year maturities can offer an advantage over cash, with today’s yields proving more durable if held through maturity.
Investors may consider exchange traded funds (ETFs) that offer exposure to a basket of short-term bonds, such as the Vanguard Short-Term Corporate Bond ETF and the iShares Short Treasury Bond ETF. These ETFs provide a combination of yield and price appreciation, but investors should be mindful of the credit quality of the underlying issues and the fees.
While short-term bonds may be an attractive alternative to cash, it is important for investors to maintain a diversified portfolio that includes exposure to a range of maturities along the yield curve. This allows investors to capture income and price appreciation, while offsetting the volatility in the stock market.
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