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Will cash continue to outperform bonds?

After a yield-curve inversion, core bonds have generally outperformed cash, lifted by yield and the benefits of extended duration.

bond vs cash following yield curve inversion chartWith yields on cash higher than they’ve been in more than a decade and the challenging bond market environment this year, some investors may be tempted to swap bonds for the “guaranteed” yield of cash. The fact that short-term rates (specifically the three-month treasury yield) just surpassed that of the 10-year bond may reinforce that thinking. However, history suggests that it may be a poor time to turn to cash as a fixed income alternative.

The chart above illustrates the excess return provided by core bonds during periods both before and after the three-month and 10-year Treasury yield inverts. Notably, the period following a yield-curve inversion has been quite positive for core bonds, as they’ve outperformed cash by an average of more than 4% in the year following the inversion. Why? Recession fears typically drive a flight to quality, providing support for longer-duration bonds. At the same time, growth and inflation expectations are generally falling, which tends to disproportionately benefit long-term treasuries. When those lower expectations morph into a recession (or even expectations for one), policymakers tend to react by loosening policy and trimming short-term rates, reducing the attractiveness of cash yields.

The outlook for bonds over a multiyear time frame is better today than it has been in some time. Certainly, cash has fared much better thus far this year, but “past performance may not be indicative of future results.” We consistently caution about the risk of selling stocks after a sharp correction. The same is true of bonds.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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