A mountain of cash and money market investments has grown on the back of the pandemic and spiking short-term interest rates in its wake (Exhibit 1). For the first time in decades, short-term paper has offered competitive rates of return, and done so within an increasingly unstable environment as central banks’ war on inflation put the economy and markets at risk. The problem is that short-term investments are exactly that. Returns are quoted only for the life of the paper and investors eventually need to roll into whatever is available at their reinvestment date. At some point, central banks will have achieved their goals and rates will fall, driving returns for those invested in the short term lower while igniting returns for riskier, longer-dated and variable return assets. Assets like bonds and stocks. 

Rates on short-term paper are currently fixed a bit above yields on longer-dated bonds, and in some scenarios that spread could remain in place or even expand if inflation reverses course to the upside. In our view, though, an even larger threat exists in waiting too long to lock in yields at today’s levels. Those that have built cash and short-term investments above the “normal” levels embedded in their investment plans should consider a path to restoring balance in their portfolios as central banks look to have rounded out their policy tightening in the past few months or are set to do so in the early months of 2024. Fortunately bonds, for many the replacement asset for short-term investments, now offer better income, valuations and benefits to portfolio dynamics than they have in 15 years.

Exhibit 1: U.S. and Canada money market fund assets

Note: as of November 15, 2023. Source: ICI, Bank of Canada, Bloomberg, RBC GAM