21 JULY 2023

Are You Being “Paid to Wait”? Why Sitting in Cash Could Be Risky

6 min read

Money-market yields have been almost perfectly correlated with the fed funds rate. In a period when the Federal Reserve has aggressively hiked rates, money-market yields have followed suit. Today, they sit at lofty heights last seen in the era of the global financial crisis—levels many investors find attractive. 


But what happens if and when the Fed reverses course and cuts rates? Historically, investors in money markets who’ve continued to reinvest as rates decline have seen their money-market yields fall. The last time the Fed cut rates was in 2007, and yields plummeted from 3.9% to 1.1%.


What Could Happen if the Fed Starts Cutting Rates?

Past performance does not guarantee future results.
Money-market yield represented by US Treasury Three Month Bill Money Market Yield Index. 
As of April 17, 2023 
Source: Bloomberg


Where to Turn? Consider Adding Duration

If sitting in cash isn’t a good idea when the Fed is cutting rates, where else can investors turn? One solution is to consider extending the duration—or interest-rate sensitivity—of bond portfolios. For every 1% decline in interest rates, a bond's price should rise by about 1% for every year of duration (and vice versa).

By adding duration when rates fall, bond investors can help maintain or even add to returns. Even adding a little duration in a falling-rate environment with ultra-short bond funds (which typically maintain a duration of less than a year) could help investors experience capital appreciation. Of course, fixed-income solutions offer wide-ranging duration profiles to suit investors’ needs and risk preferences. The more duration in an investor’s bond portfolio, the more Fed rate cuts may help bolster potential returns. 


How Have Categories Fared After Pauses in Fed Rate-Hike Cycles?

Average Annual Returns in the Periods Following Seven Previous Rate-Hike Cycles (Percent)*

Past performance does not guarantee future results.
*Data represents category average returns for the six-month, one-year, three-year, and five-year periods following the Fed rate-hike pauses on the following dates: September 1, 1984; October 1, 1987; March 1, 1989; March 1, 1995; June 1, 2000; July 1, 2006; and January 1, 2019.
As of June 30, 2023
Source: Morningstar Direct Averages 



Many forecasters project that the Fed may be at or near the end of its interest-rate hikes. If the Fed starts to cut, adding duration to bond portfolios can help investors maintain or even enhance returns.

Featured AB Investment Strategies

AB Ultra Short ETF (YEAR)
An actively managed ultra-short-duration ETF that looks to deliver higher levels of yield relative to cash or cash-like investments, while aiming for capital preservation and liquidity in all market cycles

AB Tax-Aware Short Duration Municipal ETF (TAFI)
A short-duration, actively managed municipal bond ETF that possesses enhanced flexibility to seek asset stability with attractive after-tax returns

AB Short Duration Income Portfolio (ALHYX)
Risk-weighted, short-duration, multisector income strategy that actively manages interest-rate and credit risk

AB Short Duration High Yield Portfolio (SHUYX)
Global multi-sector core credit strategy that seeks to provide attractive returns with less volatility than traditional high-yield approaches

AB Municipal Income Portfolio (SMA)
An active core municipal strategy that primarily invests in investment-grade bonds, and seeks to bolster tax-exempt income with selective investments in high yield

AB Municipal High Quality Portfolio (SMA)
Conservative, high-quality, actively-managed municipal bond portfolio that seeks the highest available level of current income exempt from federal taxes while maintaining overall portfolio risk

AB Income Fund (ACGYX)
Global multi-sector core-plus bond strategy that actively balances interest-rate and credit risk

AB Tax Aware Fixed Income Portfolio (SMA)
An active core municipal bond strategy that combines flexibility and innovation to increase after-tax returns and reduce volatility

AB Tax-Aware Fixed Income Opportunities Portfolio (ATTYX)
An active core municipal bond strategy that combines flexibility and innovation to increase after-tax returns and reduce volatility

AB High Income Municipal Portfolio (ABTYX)
A high-income fund that seeks to maximize risk-adjusted after-tax returns with the “smart” part of the credit curve by focusing on more-liquid midgrade munis to provide greater flexibility to maneuver during unpredictable markets

Important Information
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Investors should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. For copies of a Fund’s prospectus or summary prospectus, which contain this and other information, visit us online at www.alliancebernstein.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.

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There is no assurance that a separately managed account will achieve its investment objective. Separately managed accounts are subject to market risk; the market values of securities owned will fluctuate so that your investment, when redeemed, may be worth more or less than its original cost.

AllianceBernstein L.P. (AB) is the investment advisor for the Fund. 

AllianceBernstein Investments, Inc. (ABI) is the distributor of the AB family of mutual funds. ABI is a member of FINRA and is an affiliate of AllianceBernstein L.P., the manager of the funds.

The AB ETFs are distributed by Foreside Fund Services, LLC. Foreside is not related to AB.


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