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Is your portfolio cash-heavy? You may be missing bigger opportunities

Brian Erickson, Fixed Income Strategist -- Ameriprise Financial
July 17, 2023

Yields on cash investments are at their highest levels in more than a decade thanks to rising interest rates. But with the Federal Reserve slowing the pace of rate increases, investors may want to reevaluate their portfolio’s allocation to cash in favor of potentially better opportunities in fixed income. 

Here’s why:

Cash yields may remain high into 2024

Following a bold pace of hikes to tame inflation, the Fed slowed the pace of rate increases in June, leaving its overnight policy range at 5.00% to 5.25%.

While inflation may be cooling down, the jobs market isn’t. Job conditions have rarely been so strong — with unemployment at 3.7% in May and nearly two jobs for every person unemployed and looking for work. And recent comments from Fed officials highlight the need to lower inflation by increasing slack in tight labor markets. As such, future rate hikes are not off the table, just yet.

It will likely take several quarters for the Fed’s policy efforts to take effect and for inflation to fall toward the Fed’s long-term goal of 2%, suggesting cash yields could remain high into 2024. 

Source: Bloomberg L.P. and the US Federal Reserve. These figures are shown for illustrative purposes only and are not guaranteed. They do not reflect taxes or investment/product fees or expenses, which would reduce the figures shown here. Past performance is not a guarantee of future results.

There may be even better opportunities in fixed income

While the Fed’s policy rates have a heavy influence on cash investment yields, markets determine yields on fixed income investments beyond the short end of the curve. As such, we believe the time is now to reset fixed income allocations transformed into cash investments by negative yields in 2022.

For example, the Bloomberg US Aggregate Index offered a yield of 4.75% on June 28, near the highest level since 2009. Fixed income is as attractive as cash yields, if not more in our view.

The higher yield alone sets up solid total returns for fixed income. Plus, with CPI inflation well off its highs, bond yields could settle lower, adding positive price returns should yields decline. This suggests now could be an attractive time for total return investors to own fixed income rather than cash.

The time may be right for investors seeking income from their fixed income portfolios as well. By taking a buy-and-hold approach to bonds, investors can lock in today’s elevated yields for many years. While cash investment yields may be slightly higher today, we anticipate cash yields to fall once the Fed’s battle with inflation is won. By that time, intermediate and long-term bond yields may be substantially lower, reflecting a missed opportunity to lock in healthy yields for longer. 

Why the time is now to consider fixed income

The window to rebuild fixed income allocations has been open since October when Bloomberg US Aggregate Yields topped out at 5.21%. Subsequent peaks in yield have been lower, setting lower highs each time yields rise. But current levels still represent a solid opportunity — and the window soon may be closing.

The cost of sitting in cash rather than fixed income in long-term portfolios may be significant. Investors are potentially giving up the opportunity to:

  • Capture the extra total returns as intermediate yields decline
  • Lock in greater income potential at elevated yields today


Source: Bloomberg L.P. These figures are shown for illustrative purposes only and are not guaranteed. They do not reflect taxes or investment/product fees or expenses, which would reduce the figures shown here. An index is a statistical composite that is not managed. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

The bottom line: Cash is not always king

When you can earn 5% in cash investments, why take the risk of medium and long-term fixed income that earn somewhat lower yields? Especially after experiencing sharply negative returns on fixed income in 2022. Why take the risk? 

There is a place for cash and shifting excess transactional cash into cash investments makes a lot of sense today. But fixed income allocations within long-term portfolios typically benefit from the interest rate sensitivity of fixed income investments as a stabilizer for diversified portfolios. 

Talk to your advisor about fixed income opportunities

Your Ameriprise financial advisor will determine the appropriate level of cash for your portfolio and find fixed income opportunities that could help you reach your short- and long-term financial goals.

Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. 

This information may contain certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable.

Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities or strategies mentioned. 

The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor. 

Ameriprise Financial cannot guarantee future financial results.

There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.

The fund’s investments may not keep pace with inflation, which may result in losses.

A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund’s income and yield. These risks may be heightened for longer maturity and duration securities.

Past performance is not a guarantee of future results.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Definitions of individual indices mentioned in this article are available on our website at in the Additional Ameriprise research disclosures section. 

The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass throughs), ABS and CMBS (agency and non-agency). 

The Consumer Price Index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics

Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

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