Earlier this month, Goldman Sachs’ head of asset allocation research opined that bonds are becoming more attractive than cash (money market funds).
In the U.S. money market funds (MMFs) pay around 5.4%. This rate is sustainable until at least mid-2024 since the Federal Reserve indicated that it would keep rates elevated. It is determined to bring inflation down to 2.0%.
Goldman’s thesis for buying bonds depends on treasury yields currently at their peak at these levels. Bond investors need rates to stay at 4.6%.
The strategy to switch from MMFs to bonds is risky. The weak Treasury auction is finding fewer buyers for the debt. The U.S. may need to increase yields to attract buyers. This sets up a 5.0% yield baseline, hurting bond prices and raising MMF interest rates. If inflation continues, the Fed may raise rates again, pushing treasury yields to 5.5% – 6.0%.
Investors who believe in the Fed Pivot – rate cut – may buy long-dated bonds like the 20+ year ETF (TLT). The 10-year treasury ETF (IEF) is less risky). Those who want to maximize yield may buy treasuries that mature in under two years.
The takeaway is that cash remains attractive while bonds are getting there.