The cash-heavy strategy has worked during this period, because cash and very short-duration securities are much less sensitive to interest rate increases. As a rule, when interest rates rise, bond prices fall—but less so at the short end than for longer-duration securities.
For example, the Bloomberg U.S. 3-Month Treasury Bellwether Index, a benchmark for Treasury bills with a maturity of less than three months, returned 1.51% in 2022. That compared with a return of –13% for the Bloomberg U.S. Aggregate Bond Index, which represents the U.S. investment-grade market.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
But continuing to overweight cash may prove to be another example of how what worked in the past may not work so well again in the future.
With an economic downturn widely expected by markets in later 2023 or early 2024, it may be a good time to reassess how your fixed income portfolio is invested across maturities.
Trying to maximize yield today by overweighting cash or very short-term bonds in the inverted yield-curve environment has trade-offs. Moving out further on the yield curve may let you take advantage of higher yields and better defend your portfolio from weakness in equities.
Of course, the best practice is to align the duration of your portfolio allocation with your approximate timeline, especially if money will be needed relatively soon. For needs within a year or so, cash remains an appropriate option, while short-term bond funds can work well for needs within the next few years.