Many investors opt out of the safety of a money-market fund or Treasury bill and choose to take greater risks in their investing for two basic reasons: they want to secure future yields and don’t anticipate that cash will remain attractive, or that it’s a long-term place to put their money. But cash could reap rewards in the current market, contends an article in The Wall Street Journal. As the Fed tries to absorb cash from the economy, it’s paying out 4.55% to money-market funds—more than the yields on AAA-rated bonds from high-quality companies, which still carry much more risk than cash or T-bills. That’s thanks to the inverted yield curve, where long-term notes are yielding less than short-term bonds and cash. In fact, cash is yielding more than AA bonds for the first time since 1988.
Though the yield curve has inverted plenty of times over the last 60 years—preceding every recession—now companies are borrowing for longer terms, lowering those bond yields more than past inversions. That extra yield companies are paying isn’t enough to bring their yields above cash, the article explains. Right now, the earnings yield is 1% over the rate on a 3-month Treasury note; given how risky stocks are, that’s an extremely low level, fueled by investors wagering that the Fed will start to slash rates later on this year and give a boost to stocks. But even after the massive sell-off in 2022, stocks are still quite expensive in comparison to interest rates. And while stocks do have an advantage over Treasury inflation-protected securities (TIPS), offering 4.5% more, that’s the lowest bonus since 2007.
Of course, some investors are happy to take on more risk for less rewards, especially since cash certainly isn’t a sure thing. And if the market does turn around as expected, stocks will go up as interest rates go down, and investors who secured their yield on longer-maturity corporate bonds will reap their rewards. But they will have missed out the benefits of risk-free cash, the article concludes.
———————————————
Validea runs stock and ETF models based on investment strategies with proven long-term track records. If you’re new to Validea, consider taking a look at our product overview or introductory videos.