For the first time in ages, it pays — even after inflation — to hold cash. But high yields could disguise a pitfall for investors, warned an investment strategist at the Wells Fargo Investment Institute.
In May 2023, the yield on the 30-day U.S. Treasury bill topped 5%, and remains so. It stood at 5.384% late Tuesday morning. Certificates of deposit and high-yield savings accounts paying north of 4% can be found. Meanwhile, inflation as measured by the consumer-price index has fallen from a mid-2022 peak of 9.1% year over year to 3.2% as of July.
Cash Yields in Positive Territory
As the chart below from WFII shows, cash yields moved into positive territory on a real, inflation-adjusted basis after a few years of negative real yields.
To Hold or Not to Hold Cash?
The shift to a positive, real cash yield environment has investors wondering if it’s time to increase cash holdings or hold on to cash as they await better opportunities to enter the market, said Veronica Willis, a WFII global investment strategist, in a Monday note.
Related: Investors parked heavy in cash may be making a ‘mistake’, Nuveen says
Unintended Consequences of Holding Cash
But parking too much of a portfolio in cash can have unintended consequences, Willis wrote. The problem, the strategist said, is that even if cash yields remain elevated in the short term, history shows cash is likely to underperform other growth assets over the long term, acting as a drag on long-term performance.
Analysis: Longer-Dated Bonds May Outperform
Investors and strategists have recently discussed the potential for longer-dated bonds to outperform as the Federal Reserve approaches the end of its rate-hiking cycle. The 10-year Treasury yield reached a high not seen since 2007 earlier this month, but has since retreated. It is currently hovering around 4.13%, down about 7 basis points from its peak. It’s important to note that yields and debt prices move in opposite directions.
Stock Market Update
In Tuesday’s trading session, stocks were higher overall, but there has been a pullback in the rally that began in 2023 since August. The S&P 500 rose by 1.2%, while the Dow Jones Industrial Average gained approximately 200 points, or 0.6%.
Potential for Growth in Conservative Allocation
According to historical data, even a conservative allocation strategy such as “moderate income” has shown greater returns than cash over extended periods of time. This insight comes from Willis, who highlights the importance of a diversified allocation tailored to an investor’s goals and risk tolerance. Such a strategy can effectively capture the upside return potential of growth assets while mitigating volatility compared to a concentrated position.
Outlook for Strategic Asset Classes
While the current cash yield environment is not expected to return to the ultra-low levels seen in the past decade, experts anticipate that every strategic asset class will outperform cash over the long term based on their capital market assumptions.