5%+ Money Fund Yields to Dip, Shift to Bonds Advised

Key Takeaway

• Money market funds and CDs currently offer yields above 5%, but expected Fed rate cuts could reduce these returns quickly.
• Investors are advised to consider diversifying into fixed income, focusing on bonds' interest rate sensitivity, credit risk, and tax implications.
• Strategies like laddering CDs or Treasury bills and dollar-cost averaging into bond ETFs or actively managed funds can help transition from cash to fixed income.

Money Market Funds Attract Amid Rate Uncertainty

The Crane 100 Money Fund Index currently boasts an annualized 7-day yield of 5.13%, with Bread Financial offering a 1-year certificate of deposit at an annual percentage yield of 5.25%. This attractive yield landscape emerges as the Federal Reserve's future rate cuts remain uncertain, with Wall Street predictions varying widely from one to four cuts in 2024. However, Rob Williams, managing director of financial planning at Charles Schwab, cautions that yields on money market accounts could plummet swiftly once the Fed initiates rate reductions. This scenario presents a conundrum for investors, balancing the lure of high cash yields against the potential for bond price appreciation.

Strategic Fixed Income Allocation

Investors are advised to reassess their cash holdings beyond a year's worth of expenses and consider diversifying into fixed income. Ashton Lawrence, a certified financial planner at Mariner Wealth Advisors, emphasizes the importance of understanding interest rate sensitivity, credit risk, and liquidity in making this shift. Core bond funds like the Vanguard Total Bond Market ETF and iShares Core U.S. Aggregate Bond ETF offer yields around 4.77%, presenting an opportunity for investors to diversify across government, corporate, and municipal bonds. Tax considerations play a crucial role, with municipal bonds offering tax-free income, particularly beneficial for high-income investors in states like New York, New Jersey, and California.

Navigating the Shift with a Gradual Approach

For those considering a move towards fixed income, a gradual approach is recommended. Laddering CDs or Treasury bills and dollar-cost averaging into diversified mutual funds or ETFs can ease the transition. Active management in bond funds is favored by some advisors, like Lawrence, for the potential to outperform by avoiding less desirable segments of the market. Meanwhile, the upcoming SEC rules prompting a shift of up to $500 billion into government-only money funds underscore the evolving landscape of money market investments.

Street Views

• Rob Williams, Charles Schwab (Neutral on cash and fixed income):

  "Once the Fed cuts rates, yields on money market accounts will fall very quickly."

• Ashton Lawrence, Mariner Wealth Advisors (Neutral on fixed income investment strategy):

  "Figuring out where to put that first dollar comes down to what the individual is willing to achieve... Things people may want to take into consideration, whatever they invest in, is how rate sensitive is that next dollar going to be." "Spread your fixed income investments across various sectors, such as government, corporate and municipal bonds, as well as different maturities." "Highly rated munis with short maturities in taxable brokerage is something we like for investors in higher tax brackets."