Is cash king or is cash trash?

Key takeaways:

• The US Treasury yield curve (three-month vs. 10-year) is no longer inverted; cash no longer has a carry advantage. For those in cash, reinvestment risk remains as policy rates are expected to move lower over the upcoming year.
• Federal Reserve (Fed) rate-cut expectations have moderated significantly. Market pricing is now slightly more hawkish than Fed expectations.
• Fed rate-cutting cycles have typically produced higher returns for US Treasuries than cash. Credit has typically outperformed in periods where a recession was avoided, which is our base-case scenario.
• Our assumptions for US Treasury fair value show positive asymmetry for potential returns.
• One unique risk is US fiscal policy and debt sustainability, which will be in focus in 2025.

History suggests that income investors would be well served by rotating out of cash and into a diversified fixed income basket, if they have not already. Income-oriented investors are now receiving meaningfully higher yields relative to cash rates. Event studies around Fed rate-cutting cycles and reinvestment risk support this rotation. Furthermore, we believe there is now some value in current Treasury pricing, as Fed policy expectations have moderated significantly, and the US term premium has risen. Despite future fiscal policy uncertainty, which could lead to higher Treasury yields, we think it makes sense for those seeking yield to begin rotating out of cash and into other fixed income assets.