Product Spotlight: Cash Alternatives

What a difference (almost) a year makes…  At the end of 2021, short cash and bond yields were the subject of little fanfare. 
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What a difference (almost) a year makes…  At the end of 2021, short cash and bond yields were the subject of little fanfare.  The Federal Reserve was targeting a fed funds upper band of 0%-0.25%, the 2-year Treasury was yielding 0.73%, and 1-3 year corporates were at 1.12%.  Fast forward to today, and after five hikes totaling 300bps, the fed funds rate is hovering at 3.25%, the 2-year Treasury is exceeding 4.25% in anticipation of further rate increases, and 1-3-year corporates are nearly 5.4%…




As with bellbottoms and platform shoes, cash alternatives are now in vogue due to the sharp rise in short-term rates.  Products that are focused on the front-end of the curve, such as extended cash or 1-3-year strategies, may offer investors a low-risk means of capitalizing on opportunities caused by market volatility.


We believe that there is significant value to be had for investors willing to look beyond the traditional cash investments of money market funds, bank deposit accounts, and short Treasury bills.  Investors who are amenable to the two to three-year maturity range may be rewarded with slightly higher rates versus current cash equivalents and repos of 3% to 3.5%.  These levels are driven by the current fed funds target and market expectations that fed funds will continue to rise until peaking at 4.6%-4.7% in March 2023.




Historically, in rapidly evolving markets, money market fund yields typically lag, which makes the case for extended cash and 1–3-year offerings even more compelling.  With yields up approximately 500bps since year end, and forward rates pricing in relatively stable rates for the next two years, we believe that cash alternatives are a worthwhile consideration right now.  Whether to mitigate portfolio volatility, de-risk, or generate income, extended cash might be like slipping into that old pair of bellbottom jeans in the back of your closet.




Sources: Bloomberg as of 10/12/22. Chart 1: US Federal Funds Effective Rate, and 2-year UST, from respective Bloomberg Indices; 12/31/2021 – 10/12/2022. Charts 2 – 5: Sources: Bloomberg as of 9/30/22. Chart 5: Rate increase needed to return 0% calculated by dividing the yield by the duration. Where rates need to get to return 0% takes the yield and adds the rate increase needed to return 0%. Chart 6: 150% Bloomberg 1-5 Year US Corporate BBB Index / 50% Bloomberg 1-5 Year US Corporate BB Index (2% Cap). Portfolios and corresponding benchmarks are shown using the same color. Portfolios are shown as circles and benchmarks as squares. Characteristics are preliminary as of 10/12/22. Yields are represented as of 10/12/22 and are subject to change. Source: Bloomberg as of 10/12/22


The views contained in this report are those of IR+M and are based on information obtained by IR+M from sources that are believed to be reliable but IR+M makes no guarantee as to the accuracy or completeness of the underlying third-party data used to form IR+M’s views and opinions. This report is for informational purposes only and is not intended to provide specific advice, recommendations, or projected returns for any particular IR+M product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Income Research + Management. “Bloomberg®” and Bloomberg Indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by IR+M. Bloomberg is not affiliated with IR+M, and Bloomberg does not approve, endorse, review, or recommend the products described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any IR+M product.​

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