The Temptation to Abandon Bonds for Cash
It is tempting to look at today’s interest rates and believe money markets and high-yield savings accounts are better options than traditional bonds. Cash equivalents today pay higher yields, you don’t have to worry about the price declining, AND you have the flexibility to move assets at a moment’s notice. But, as good as that all sounds, for long-term bond investors, there is more to consider.
Source: Blackrock
First, it is important to remember that just as people often shoot themselves in the foot by trying to time the stock market, the same thing happens in the bond market. People get scared of bonds (or bond funds) when prices are going down, they move to cash, and then get back in once yields have come down and prices have already gone back up. Humans, on average, are terrible investors.
Source: JP Morgan Guide to the Markets
If you have been thinking about taking some of your bond money and moving it to cash, and you don’t need that cash for upcoming expenses, our recommendation is to hold off. Stick with the bonds.
As noted in this chart, bonds tend to outperform cash when:
The Fed Funds Rate is greater than inflation;
The Fed starts lowering rates;
The yield curve normalizes.
We find ourselves in this environment for 2 of 3 of the matrix and headed that direction on the 3rd. So, despite bonds’ early price declines in 2024, we believe the next 12 months could very well see that trend reverse and if that happens, bonds will once again outperform cash, and bond investors who stayed the course will benefit.
As always, if you have questions about this or anything else, never hesitate to reach out and we’ll be happy to discuss how this applies to your personal situation.