Why Cash Is Still King for Short-Term Goals

Yields on intermediate- and long-term bonds are higher than they’ve been in more than 24 years. But is this a good time to buy in?

When I last wrote about this topic about a year ago, there was close to a universal consensus that the Federal Reserve would cut interest rates at least once before the end of the year, leading to price gains for longer-duration bonds. (That prediction was correct: The Fed made rate cuts totaling 75 basis points in September, October, and December 2025.)

But for investors with short time horizons, I argued that keeping assets on the short end of the yield curve—in cash specifically—was still the best approach. My argument, in a nutshell, was that incremental payouts on longer-duration bonds weren’t high enough to compensate investors for their risk, while cash yields remained comfortably ahead of inflation.

A lot has changed in the past 12 months, but I’m still convinced that keeping assets in cash is the most prudent approach if you’re saving for a shorter-term spending need. And I still believe most investors should think twice before buying long-duration bonds, unless they’re buying individual bonds that they plan to hold to maturity.

What’s Changed

The yield curve looks very different from what it did a year ago. The yield on the 10-year Treasury has climbed by a full percentage point, driven by concerns about rising US government debt levels, the war in Iran, and additional rate hikes that may be needed to rein in inflation. At the same time, cash yields have moved up slightly, especially in the wake of the 25 basis point rate hike the Fed made at its September meeting.

A year ago, the yield curve had more of a V shape, with relatively high yields at the short end that dropped off and then sharply increased after the three-year maturity mark. That’s no longer the case, as the yield curve has returned to a more normal upward-sloping shape. Yields on the 10-year Treasury also look much better from a historical perspective—in fact, payouts on the benchmark T-note are at their highest levels since 2002. Payouts for 20- and 30-year Treasuries are also higher than they’ve been in more than 24 years.

With that backdrop, some institutional investors such as Pimco, BlackRock, and Barclays have argued that investors should take this opportunity to lock in higher yields on bonds with longer maturities.

Why I’m Still Cautious About Long-Duration Bonds

I’m not convinced that’s the best move. For one, the yield on the 30-year Treasury was roughly 150 basis points higher than that of the three-month T-bill as of Sept. 30, but that gap (also known as the term spread) remains below its longer-term average, which is about 190 basis points. In other words, investors may not be getting paid enough for the additional risk involved in venturing out to the longer end of the yield curve.

On a related note, yields on longer-duration bonds might not be high enough to cushion investors from losses if the Federal Reserve makes additional interest rate hikes to tamp down inflation. The 10-year Treasury, for example, currently has an effective duration of about 7.75 years, suggesting that its price would decline by roughly 7.75% if interest rates rose by 100 basis points. The 5.2% yield would partially offset that decline, but the bond would still have net losses of about 2% after accounting for that cushion.

Another way to think about this risk is escape velocity, which Cullen Roche explains in more detail here. As shown in the graph below, bonds with maturities of about 6.2 years or less currently offer high enough yields to buffer losses from a 100-basis-point rate hike, but longer-maturity bonds do not. To be fair, longer-duration bonds would be less risky in the event of a smaller rate hike, and many institutional investors currently expect the Fed to make a final rate hike of just 25 basis points in early December. But as we’ve seen in recent months, yield and price movements on longer-duration bonds aren’t directly tethered to the benchmark federal-funds rate.

In addition, cash yields remain slightly ahead of inflation, as shown in the graph below. Assuming inflation continues to moderate, yields on cash are still high enough to give short-term savers a buffer against losing purchasing power from the effects of inflation.

The Big Picture

On a more fundamental level, it’s always more prudent for investors to take a conservative approach to saving for shorter-term goals. Indeed, even relatively safe securities aren’t totally immune to potential losses. The median fund in Morningstar’s ultrashort-bond Category was down about 1.2% during the financial crisis in 2008 and 1.3% in the first quarter of 2020. Because they’re not completely immune from losses, ultrashort bond funds aren’t always the best place to keep assets for short-term spending needs. As detailed in Morningstar’s Role in Portfolio framework, they’re more appropriate for investors with a time horizon of at least one to two years.

If you’re saving for a shorter-term spending need, keeping assets in cash is the most prudent approach. As Warren Buffett wrote in his 2018 letter to shareholders, cash and cash equivalents make an excellent buffer against “external calamities.”

Longer-duration bonds, on the other hand, still carry a fair amount of risk, especially for investors who aren’t planning to hold them until maturity.