Is cash king or is cash trash?

The recent changes in the US Treasury yield curve, which is no longer inverted, indicate that cash no longer holds a carry advantage, presenting a reinvestment risk as policy rates are anticipated to decline over the next year. Expectations for Federal Reserve rate cuts have become more conservative, with market pricing slightly more hawkish than the Fed's own projections. Historically, periods of Fed rate-cutting cycles have resulted in higher returns for US Treasuries compared to cash, with credit markets often outperforming in scenarios where a recession is avoided, aligning with the current base-case outlook.

Investors focusing on income should consider shifting from cash to a diversified fixed income portfolio, as they can now achieve higher yields than cash rates. This is supported by event studies on Fed rate-cutting cycles and the associated reinvestment risks. Current Treasury pricing appears attractive due to moderated Fed policy expectations and a rise in the US term premium. Despite uncertainties surrounding future US fiscal policy and debt sustainability, which could potentially elevate Treasury yields, it is advisable for yield-seeking investors to start transitioning from cash to other fixed income assets. This strategy is underpinned by positive asymmetry for potential returns in US Treasuries, despite fiscal uncertainties anticipated to become more prominent in 2025.