For the first time in more than two decades, cash and other risk-free securities are delivering larger returns than a 60/40 portfolio of stocks and bonds.
The yield on six-month US Treasury bills rose as high as 5.14% Tuesday, the highest since 2007. You can find 1 yr. CDs at major brokerages yielding 5%+ with full FDIC coverage (up to $250k pp). These yields are ABOVE the 5.07% yield on the classic mix of 60% US equities and 40% fixed-income securities for the first time since 2001 (based on the weighted average earnings yield of the S&P 500 Index and the Bloomberg US Aggregate Bond Index).
The Federal Reserve has taken its most aggressive monetary tightening since the 1980s over the last year in an effort to reign in inflation. These moves have upended the investing world by steadily driving up “risk-free” interest rates — such as those on short-term Treasuries and cash (money market accounts and CDs) — that are used as a baseline in world financial markets.
The yield on six-month bills rose above 5% on Feb. 14, making it the first US government obligation to reach that threshold in 16 years.
Given investors can earn better yields with far less risk than stocks, there is less incentive for risk-adverse investors to invest in stocks – currently. Past performance over a variety of stock market environments has proven that, over the long term, stocks have outpaced cash, treasuries and inflation. And we believe this will be the case in the future as well. But we are in interesting times when ‘cash is KING’.