fixed income | march 18, 2024
Is now the time to redeploy cash?
Historical performance of federal funds interest rate cycle peaks could help investors decide when to reinvest cash.
2:18
Terry Davis
Director of Investment Solutions
Andrew Wick, CFA®
Lead Analyst, Portfolio Construction Solutions
Analyzing historical performance near past federal funds interest rate cycle peaks could help investors decide when to move cash off the sidelines. But is now the time to redeploy cash? To help answer this question, we looked at the average 12 month returns of select asset classes during the past four funds industry peaks since 1993 versus a cash proxy, the 90-day Treasury bill.
We analyzed the impact of investing at various starting points prior to, at, and after the cycle peak. Our analysis suggests that investors may not need to wait for the peak to reinvest cash. First, we looked at a balanced portfolio of 60% stocks and 40% bonds. When invested one year prior to the federal funds peak, this portfolio lagged the cash proxy, but outperformed at all other starting points. Second, redeploying cash into fixed income three months and six months prior to the peak, at the peak, and after the peak significantly outperformed the cash proxy.
While equity performance is not as clear cut as fixed income, investing at the peak was optimal. While past performance is not a reliable predictor of future returns, we may be nearing a point at which opportunity costs begin to favor stocks and bonds over cash. If you believe we are at or close to a peak in the federal funds rate, you could consider moving excess cash into a diversified financial model such as a balanced 60/40 portfolio.
More risk averse investors could focus on deploying cash into fixed income, while it may make sense to wait to reinvest in equities. If you have questions about when and how to reinvest cash into the market, please visit troweprice.com and read the insight, Is now the time to redeploy cash?
Key Insights
Market uncertainty and short-term interest rates above 5% have contributed to record assets in money market funds. With all this cash on the sidelines, many investors want to know when to redeploy cash back into the market.
Our analysis compared the historical impact of investing various asset classes and a balanced 60/40 portfolio of stocks/bonds versus cash at multiple starting points before, at, and after the fed funds interest rate cycle peak.
Based on history, investing in a diversified 60/40 portfolio slightly before or at the fed funds peak may be optimal, while investing after the peak still outperformed cash.
Fixed income also outperformed in all periods except one year before the fed funds peak starting point. Equity results were not as clear-cut as fixed income, but investing at the peak generated significantly better returns than cash and bonds.
Ongoing market uncertainty combined with short-term interest rates above 5% have resulted in a record amount of assets moving into money market funds. According to Morningstar, investors held approximately $5.6 trillion in money market accounts as of August 31, 2023, representing an increase of over $1 trillion over the prior 12 months. Based on our client conversations, we have seen a significant rise in cash and cash proxies held in financial models. We are also seeing cash held outside the models, waiting to be redeployed into the market.
Interest rate peaks could be the key to timing cash reinvestment
As shown in Figure 1, the federal funds interest rate and the 10-year U.S. Treasury yield historically tended to peak together. However, our research suggests that investors don’t need to wait for the peak to redeploy cash.
Subscribe to T. Rowe Price Insights
Receive monthly retirement guidance, financial planning tips, and market updates straight to your inbox.
Fed funds interest rates and Treasury yields tended to peak together
(Fig. 1) Fed funds rate and 10-year U.S. Treasury yield: December 31, 1993, through September 30, 2023
Past performance is not a reliable indicator of future performance. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Source: Haver Analytics/Federal Reserve Board. T. Rowe Price analysis using data from FactSet Research Systems, Inc.
The T. Rowe Price Portfolio Construction team analyzed similar historical periods that could help investment professionals make informed decisions on when to redeploy cash back into the markets. Our analysis focused on the average 12-month returns of the past four fed funds interest rate peaks and looked at the impact of investing at various starting points prior to, at, and after the cycle peak.
For the peak interest rate dates, we used February 1995, May 2000, June 2006, and December 2018. We used the 90-day T-bill to proxy cash and cash equivalents in our study, and we compared these returns with a typical moderate-risk portfolio composed of 60% stocks (S&P 500 Index) and 40% bonds (Bloomberg U.S. Aggregate Bond Index), as well as a selection of common fixed income and equity benchmarks.
As shown in Figure 2, a balanced 60/40 portfolio underperformed the cash proxy when invested one year prior to the fed funds peak. The stock component performed relatively well during this period, but the bond component lagged as interest rates were still rising. The balanced portfolio outperformed the U.S. 90-Day Treasury bill cash proxy at all other starting points. The outperformance was greatest when invested at the peak, followed by the three- and six-month pre-peak starting points, respectively. Outperformance was smaller after the peak.
A 60/40 portfolio outperformed in all periods except one year before the fed funds peak
(Fig. 2) Average one-year total return of 60/40 portfolio over prior four fed rate hike cycles
Past performance is not a reliable indicator of future performance. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Sources: Morningstar, Standard & Poor’s, and Bloomberg. See Additional Disclosures
As shown in Figure 3, the pattern among fixed income portfolios is clear: Redeploying cash three and six months prior to the peak, at the peak, and after the peak significantly outperformed the cash proxy. Investing too early—one year prior to the peak—was less than optimal as the cash proxy outperformed. The best outcome occurred when deploying cash six or three months before the peak as longer-duration fixed income significantly outperformed cash as the peak approached. A global fixed income portfolio followed a similar path as U.S. fixed income, while the performance of high yield was mixed.
Fixed income also outperformed in all periods except one year before the fed funds peak
(Fig. 3) Average one-year fixed income total return over prior four fed rate hike cycles
Past performance is not a reliable indicator of future performance. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Sources: Morningstar, Bloomberg, and Bank of America. See Additional Disclosures.
As shown in Figure 4, equity performance was not as clear-cut as fixed income, but there are some important observations. Investing in equities prior to the peak generally outperformed cash, while investing after was less beneficial. The S&P 500 Index and Russell 1000 Growth Index outperformed in all time periods except the period starting three months after the peak. The Russell 1000 Value Index significantly outperformed from six months before to three months after the peak. The performance of small-caps and international equities was mixed.
Equity investments generally outperformed when invested at the fed funds peak
(Fig. 4) Average one-year equity total returns over prior four fed rate hike cycles
Past performance is not a reliable indicator of future performance. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Sources: Morningstar, Standard & Poor’s, and Russell. See Additional Disclosures.
Opportunity costs could favor stocks and bonds over cash
There are several compelling reasons to allocate money in cash-equivalent investments, including enhanced liquidity, low volatility, and the current high interest rates. However, there are also reasons to consider redeploying excess cash as we may be nearing a point at which opportunity costs begin to favor stocks and bonds. If the belief is that we are at—or close to—a peak in the fed funds rate, history shows us that investing in a diversified 60/40 portfolio slightly before or at the fed funds peak may be optimal, while investing after the peak still outperformed cash.
Additional Disclosures
Bloomberg: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
Morningstar: © 2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
MSCI: MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
Russell: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication. The LSE Group is not responsible for the formatting or configuration of this material or for any inaccuracy in T. Rowe Price’s presentation thereof.
Standard and Poor’s: The S&P 500 Index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). T. Rowe Price’s products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.
Important Information
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are those of the authors as of December 2023 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.
View investment professional background on FINRA's BrokerCheck.
202312-3295531
Next Steps
Gain our latest thinking on the markets.
Contact a Financial Consultant at 1-800-401-1819.