Despite the Federal Reserve’s expected rate cut next week, Americans are continuing their love affair with cash. However, experts warn that they must take steps if they want to lock in attractive returns. Assets in money market funds hit $6.3 trillion in the week ended Wednesday, another record, according to the Investment Company Institute. The funds have attracted inflows because of their favorable payouts. The 7-day annualized yield on the Crane 100 list of the 100 largest taxable money market funds is currently 5.08%. Bank of America expects those inflows to continue, even after the Fed starts cutting rates. The central bank is scheduled to meet Sept. 17-18, and more than 70% of traders expect a quarter-point cut in the federal funds rate, according to the CME Group’s FedWatch tool. The remaining traders think it will be a 50 basis point cut. “Federal rate cuts are unlikely to free up money market funds unless rates are below 2%,” Bank of America strategist Mark Cabana wrote in a note last week. “Federal rate cuts should slow money market inflows but are unlikely to trigger outflows unless the cuts are much deeper than market expectations.” He said history shows that when investors move out of money market funds, they move into fixed income rather than stocks. Peter Crane, founder of CraneData, which tracks the industry, said institutional investors will also continue to move into money market funds as the Fed cuts rates because any cash they have in direct money market investments, such as Treasuries, will be hit by rate cuts faster than money market funds. “Money fund yields track the Fed, so they should fall 25 basis points in the month following any Fed move,” Crane said, using the assumption that the central bank will cut rates by 25 basis points. Making a Move Experts have warned investors not to hold too much cash. Instead, figure out how much you might need in an emergency, as well as what cash you want to keep for future opportunities or purchases, said Ted Jenkin, a certified financial planner and founder of oXYGen Financial. In that case, you can leave the money in liquid assets like money markets or high-yield savings accounts. For cash that can be locked up a little longer, consider a certificate of deposit, he said, but act sooner rather than later. “If you want to maximize the return on your cash for the next 12 months, it’s probably better to lock up a 9-month or 12-month CD,” said Jenkin, a member of CNBC’s Financial Advisors Council. “It’s at the peak of what it’s going to be as the Fed is cutting rates over the next 12 months.” CD rates have already fallen, with both American Express and Broad Financial cutting their 12-month rates last week, according to BTIG. The firm believes banks are pushing customers toward savings accounts, which have uncapped interest rates. Still, the payouts remain attractive. Bread Financial remains at the top of the list with a 4.9% annual yield. Once you have the right cash needs, consider moving any excess money into fixed income, Jenkin said. “It’s a great time to increase the duration of your bonds,” Jenkin said. He extends to five and 10 years, and likes investment-grade corporate bonds. So does Leslie Falconio of UBS, who calls the 4-1/2- to 5-year portion of the curve “the sweet spot.” “We’ve seen a record number of issuances in investment-grade corporates in the first week of the month, but investor demand is still there,” she said. Falconio, head of taxable fixed income strategy at UBS Americas, said the assets are seeing a lot of inflows and investors are able to get a good return on a high-quality asset. She also likes mortgage-backed securities, a high-quality, liquid sector. The products are debt obligations issued by agencies whose cash flows are tied to the interest and repayment on a range of mortgage loans, such as Fannie Mae, Freddie Mac and Ginnie Mae. These products are considered low-risk because they are backed by the U.S. government. “It’s not that we think there will be a default or high-yield issue, we just think it’s very tight,” Falconio said. Another place investors can look is in preferred stocks, which tend to perform very well when interest rates are low, according to Jenkin. The securities are a hybrid product — they trade on exchanges like stocks but have face values and pay income like bonds. “This is the forgotten asset class,” he said. “It’s a good time to own them because they will continue to pay a steady yield and will also see prices rise.”
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Money Market Funds Hit All-Time Highs But Experts Warn It's Time to Ditch Cash
