The era for hiding out in cash is coming to an end, according to UBS. While investors have been earning yields of more than 5% on instruments like money market funds and certificates of deposit, those rates aren’t expected to stick around much longer. “We believe investors should limit their overall cash balances as falling interest rates this year and beyond will diminish returns on cash,” Solita Marcelli, chief investment officer Americas for UBS Global Wealth Management, wrote in a note Monday. Investors flooded into money market funds as the Federal Reserve began raising interest rates in 2022. There is now more than $6 trillion sitting in the funds now, according to the Investment Company Institute . The Crane 100 Money Fund Index currently has an annualized seven-day current yield of 5.12% as of May 20. Meanwhile, Bread Financial has a one-year certificate of deposit with an annual percentage yield of 5.25%. However, those yields will come down as the Federal Reserve cuts rates. The market is currently predicting those rate cuts will begin in September, according to the CME Group FedWatch Tool . “We see value in building a liquidity strategy beyond cash and money market funds, including fixed-term deposits, bond ladders, and structured investment strategies to cover expected portfolio withdrawals over the next five years,” Marcelli said. With a bond ladder strategy, investors buy several bonds with staggered maturities and then reinvest the earnings from the expired issues into new, longer-dated bonds. She also recommends holding strategic, diversified exposure across fixed income. Where to invest Right now, UBS thinks high-quality credit is poised to outperform. It likes agency mortgage-backed securities , investment-grade corporate bonds, AAA-rated commercial mortgage-backed securities and 10-year Treasury inflation-protected securities, Leslie Falconio, head of taxable fixed income strategy in UBS Americas’ chief investment office, said in a separate note Saturday. The bank moved AAA CMBS to a most preferred allocation at the beginning of the year after believing headline risk was priced in and the assets would benefit from the peak in Fed rates. The higher quality AAA CMBS sector “has outperformed even in the face of the volatile rate environment this year and so should continue to benefit as rates and volatility decline in the months ahead,” Falconio wrote. UBS also moved out on the curve on TIPS earlier this month after initially buying 5-year inflation protected securities in August. With TIPS, the principal portion rises and falls alongside the movement in the consumer price index for all urban consumers. At maturity, you get the greater of the increased inflation-adjusted price or the original principal. US10YTIP 1Y mountain 10-year TIPS U.S. 10-year TIPS are currently yielding about 2.08%. “Value in fixed income is relative and while there remains inter/intra opportunities within the sector, it is not a time to be complacent,” Falconio said.
