Behind the Yield
Breaking down the risks of cash, the mechanics of financial repression, and where bonds make sense right now.
WHERE ARE WE NOW
Roughly $7 trillion sits in money market funds — a record amount that tells us everything about how clients are positioned right now. Yields between 4.0% and 4.4% appear to be stable, safe, and readily accessible. People valued cash as a way to have power because they were scared in 2022.
The problem is that those yields won’t last. The Federal Reserve sets the rates for money markets. They go down almost right away when cuts start. Today, it appears that you’ll have a steady 4% income stream, but it will quickly decline to 3%, then 2%, and so on. Inflation and taxes continue to rise in the background, meaning that clients who think they are standing still are actually moving backward.
Cash is useful. But it’s not a plan. It’s a place to hold things.
WHY MONEY MARKET FUNDS DON’T WORK LONG TERM
It’s clear why people want cash, but the math doesn’t work.
Yields quickly decline: Money markets closely track the Fed’s actions. The first rate cut lowers returns in weeks, not years.
Opportunity cost: Clients who keep their money in cash are missing out on the chance to lock in the current yields on Treasury, agency, or municipal bonds. When the Fed cuts interest rates, those opportunities vanish.
Real returns that are negative: A yield of 4.3%, minus 25% tax and 3.5% inflation, gives you a “real” return that is less than zero. There is a long-term cost associated with maintaining liquidity.
This is why the $7 trillion isn’t a safety trade; it’s a comfort trade. And comfort goes away quickly when policy changes.
FINANCIAL REPRESSION. THE BIGGER BACKDROP
This issue isn’t only about money market funds. It’s about policy. The U.S. has debt that exceeds 120% of its GDP. The government needs to keep interest rates low compared to inflation and economic growth to manage its debt. That’s what financial repression is.
The mechanics are straightforward. If yields are lower than inflation, it will be easier to pay off debt. It’s a tax that the saver doesn’t see. Even though nominal coupons appear favorable on paper, actual returns are declining.
It’s why investors can’t just look at the headlines for yields. The system is designed to benefit borrowers, like the government, more than savers.
CONCRETE IDEAS IN TODAY’S BOND MARKET
What should advisors be looking at right now if cash isn’t the correct long-term answer?
Ladders: Treasuries or agencies that last from 1 to 5 years. Lock in today’s higher coupons before cuts lower yields. Stagger maturities and reinvest steadily.
Barbells: Keep short maturities to keep your money liquid, and go out longer to take advantage of possible rate cuts. A beneficial way to play both defense and offense.
TIPS: Real, not nominal, inflation hedging. Even a sleeve of TIPS shows clients that you’re protecting their income from the hidden risk.
Munis: For clients in higher tax brackets, a 4% muni is the same as a 6% taxable. Math that shows how much tax you would pay is more convincing than just coupons.
Credit: Spreads aren’t very wide, but some investment-grade corporates can still add to the yield. Don’t reach too far; this isn’t the time for blind credit risk.
The main idea is structure, not prediction. Advisors don’t have to guess what the Fed will do next. They just need to use today’s yields intentionally before they disappear.
KEY TAKEAWAYS
$7 trillion in money markets isn’t safe; it’s a comfort trade that will go away quickly when the Fed cuts.
Financial repression is still going strong. Nominal yields look good, but when you take taxes and inflation into account, real returns are often negative.
There is a real cost to staying in cash. Advisors should utilize today’s yields with intention before they disappear.
The $7 trillion in cash won’t stay there forever. The only thing that matters is whether it gets put to good use again or only after the yields have gone down.
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