If you were waiting for your cue to step out of high-yielding money market funds, the bell is about to ring. The Federal Reserve is widely expected to start cutting interest rates Wednesday afternoon. Central bank policymakers embarked on their rate-hiking journey in March 2022, which had the pleasant side effect of boosting yields on a range of plain-vanilla investments, including Treasury bills and certificates of deposit.
Currently, the Fed's benchmark interest rate sits at a target range of 5.25% to 5.50%.
But the days of 5% yields on money market funds are numbered, even as more than $6.3 trillion in assets is sitting there. Those yields are expected to start coming down sharply as the Fed begins to ease back on generationally high rates.
Already, the 2-year Treasury yield, especially sensitive to Fed policy, has cooled significantly in recent months and now sits at 3.59%. In April , it topped 5%.
"Believe me, we were on the road for a year, encouraging people to extend duration," said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. "It's a tough sell if you are sitting in T-bills or money markets at 5%." Adding some duration Duration refers to a bond's price sensitivity to changes in interest rates.
A bond yield moves inversely to its price, so that when bond prices rise, yields decline. Further, issues with longer maturities tend to have greater duration. "We favor the intermediate-term portion of the curve, which provides attrac.