September 26, 2023
With cash providing attractive yields, an investor could be tempted to remain in cash instead of shifting back into the bond market.
In the chart below, we look at the 2-year forward annualized returns for the aggregate bond market and cash following the past four instances of a yield curve inversion over the last two decades. The chart demonstrates that in each instance, an investor would have fared better investing in the aggregate bond market than cash.
Bonds have outperformed cash following yield curve inversions
A yield curve inversion occurs when 3-month Treasury yields are higher than 10-year Treasury yields.
Source: Morningstar. The start date of each 2-year period is the day after the instance of a yield curve inversion in which 3-month US Treasury bills yielded higher than 10-year US Treasury bonds. Asset classes are represented as follows: Bonds – Bloomberg US Aggregate Index; Cash – Morningstar Money Market – Taxable Category.
What this means for investors
During yield curve inversions, investors may opt to stay in cash given the attractive yields. However, history shows us that shifting into the bond market at times of higher short-term yields may generate greater forward returns. Core-plus bond funds seek to outperform the Bloomberg US Aggregate Index and may be an appropriate option for investors looking to move out of cash.
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