While money markets and certificates of deposit still produce solid returns, holding too much cash could cost investors money. Investors have been investing in cash-like assets in recent years – and they have remained, despite the central bank’s decision to cut interest rates three times last year. The Fed’s last rate cut came in December and it is now on hold as it monitors economic data and the impact of the Iran war. “In an environment where cash levels have grown both tactically and structurally, the opportunity cost of staying on the sidelines could increase,” BlackRock warned in a report last week. According to the Investment Company Institute, money market fund assets totaled $7.63 trillion in the week ended April 29. In previous rate-cutting cycles, the one-year average return on capital after rate cuts began was about 2.8% after a pause of three months or longer, BlackRock analysis showed. To represent cash, the company used the Bloomberg US T-Bills 1-3 Month Index. In contrast, bonds have historically returned 7% to 9% over the same period, BlackRock noted. While recent events make it difficult to predict what the Fed might do on interest rates – and a trio of central bank officials recently disagreed with the suggestion that the next step could be a rate cut – BlackRock is telling investors to at least hedge their bets. “The current consensus is trending higher for an extended period of time and may even be trending toward a more hawkish Fed policy stance,” said Stephen Laipply, global co-head of iShares Fixed Income ETFs, in an interview with CNBC. “The risk is that if things resolve quickly, albeit unexpectedly, in terms of geopolitical risk, there could be a reversal,” he added. “As usual, interest rates may have already shifted and given a different direction to Fed policy, if you might respond by extending duration, even if modest.” Overall, the majority of traders don’t expect a cut at all this year, according to the CME FedWatch tool. About 16% expect interest rates to rise at the end of 2026, while almost 12% expect them to ease. “[W]“We believe the market continues to overstate the risk of central banks such as the Fed raising or not lowering interest rates,” UBS said in a note last week. “This represents an opportunity for investors to lock in returns by accumulating quality bonds, particularly in the short and medium-term segment.” “While we invest and wait, you’ll still get a nice coupon on fixed income.” The risk is that inflation is much higher than expected, forcing the Fed to raise interest rates, he added. But Alvarado believes it is more likely that rates will be raised for now as events continue to develop. “We don’t think the price of energy will stay at this level forever,” he said. “Yes, we do.” We are still at an impasse at the moment, but we don’t believe this will be sustainable as we look to the next three to five years. Alvarado also sees opportunity in municipal bonds, which have a taxable yield of about 5.84%. That’s a very high initial yield to hold as a buy-and-hold municipal bond investor, he said. According to Laipply, the fund has a 30-day SEC yield of 4.26% and an expense ratio of 0.25% with an effective duration of 2.14 years. “We still believe this is a really big opportunity in fixed income,” Laipply said. There is a lot of geopolitical risk, but I think the capital flows themselves show that investors are looking beyond that.”
