Is cash king or is cash trash?

CONTRIBUTORS

Wylie Tollette, CFA

Chief Investment Officer,
Franklin Templeton Investment Solutions

Tom Nelson, CFA, CAIA

Head of Market Strategy
Franklin Templeton Investment Solutions

Miles Sampson, CFA

Head of Asset Allocation Research,
Franklin Templeton Investment Solutions

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.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results.

Fixed-income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Active management does not ensure gains or protect against market declines.

Important Legal Information

This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any research and analysis contained in this document has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Any views expressed are the views of the fund manager as of the date of this document and do not constitute investment advice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole.

There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein.

The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.