Investors might want to consider boosting their cash holdings right now. The Federal Reserve recently indicated they’re planning fewer rate cuts next year, according to Jeffrey Gundlach, a prominent figure in fixed income investing. This past Wednesday, the Fed trimmed the federal funds rate by a quarter percentage point, setting it between 4.25% and 4.50%. More notably, they now anticipate only two more rate cuts next year instead of the four they hinted at back in September. Gundlach sees this as the limit. For those invested in cash-equivalent options such as money market funds, this news is promising. As of now, the Crane 100 Money Fund Index shows an annualized seven-day yield of 4.41%.
Gundlach, who leads DoubleLine Capital, says, “It’s time to ramp up your cash holdings because those cash yields are sticking around. Earlier, there seemed to be a chance the cash yield might shrink, but that doesn’t seem likely after the Fed’s recent press conference.”
Following a two-day meeting, Fed Chair Jerome Powell mentioned that the central bank will evaluate inflation progress before deciding on any potential rate cuts next year. He added, “We can take a more cautious approach when evaluating future policy rate changes.” Wall Street, however, has been cautioning investors for months to reduce excess cash holdings and consider extending bond durations to secure yields as the Fed proceeds with its rate-cutting strategy. Indeed, yields in money markets, certificates of deposit, and high-yield savings accounts have been declining in step with the Fed’s actions.
Despite this, many Americans continue pouring funds into money market accounts. Currently, these funds hold around $6.77 trillion, according to the Investment Company Institute. This is nearly half a trillion more than the balance in September, before the Fed initiated its first rate cut in four years, followed by two additional reductions.
In the current scenario, Gundlach suggests holding about 30% of a model portfolio in cash. “You’re not losing much yield compared to other more volatile and risky assets,” he states. He further recommends allocating 50% in bonds and about 20% in stocks. When it comes to fixed income, Gundlach is avoiding the longer end of the yield curve; for instance, he doesn’t favor assets beyond 10-year Treasury notes. “There’s no additional yield benefit there,” he explains. “I suggest focusing on lower durations than what’s typical for an index fund and developing a portfolio positioned in the middle of the capital structure. This has been our strategy throughout the year.”
