This article was originally published on ETFTrends.com.
Declining money market yields make sitting in cash increasingly costly.
Treasuries offer attractive real yields and lower volatility than equities.
Strong equity gains create an opportunity to rebalance into bonds.
Now that the book has been closed on the first half of 2026 – a period propelled by the AI-driven technology trade – investors are searching for what to do next. For those investors that have ridden the stock market up to near all-time highs, they may be thinking about reducing their equity exposure and adding fixed income to their portfolio. Others that have sat paralyzed on the sidelines, looking for the right time to enter the market, may simply want their money to work for them. We will walk through how both types of investors should view bonds moving forward.
For the investor that has been sitting in cash, the last few years have been manageable due to money market funds paying competitive rates. Prior to 2022, money market rates were pinned near zero, so there was an incentive for investors to allocate to equities. Post-2022, after interest rates moved higher, some conservative investors sold stocks and retreated to the sidelines as they were able to receive yields just above 5% in money market funds. However, since peaking in 2023, money market fund yields have steadily declined… and currently are just below 3.50%. Investors that choose to stay in cash will face further reinvestment risk if money market yields continue to decline.
According to the St. Louis Federal Reserve Bank, at the end of Q1 there was over $8.2 trillion held in money market funds, as shown in Chart 1. The steady decline in money market yields should be a call to action for investors sitting in cash and cash equivalents, in our opinion.
From our perspective, despite the Fed currently taking a 'hawkish' tone to fight inflation, we do not believe that they will hike interest rates in 2026. The upward movement of yields since the beginning of the Iran War has tightened financial conditions for all bond maturities from two to thirty years (the yield curve). For conservative investors that are in cash and cash equivalents, the focus should be on the front-end of the yield curve, as it is more sensitive to changes in monetary policy that impact money market fund rates.
Currently, the 2-year Treasury is yielding 4.21%, which is 0.83% higher than where it was at the end of February… while money market yields have only fallen further. By investing in short-term bonds, investors that have been risk-adverse can gradually re-enter the market without meaningfully changing their risk profile.
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