Cash Management in a Low but Rising Rate Environment

Davis, Joseph H.
July 2004
Journal of Financial Planning;Jul2004, Vol. 17 Issue 7, p44
Academic Journal
• With short-term interest rates near their lowest recorded levels since the first money market fund was established, and with rates not expected to rise much in the near term, some investment professionals have reduced client allocations in money market funds. • This article reiterates the proper role of money market funds in a well-diversified portfolio, principally to protect against downside risk by outperforming stocks and bonds in a rising interest-rate environment. • Regardless of their current low yield, money market funds remain a more appropriate reserve vehicle than higher-yield alternatives such as short-maturity bond funds and longer-maturity bank deposits such as five-year certificates of deposit. That's because money market funds are less sensitive to negative inflation surprises and their 90-day-or-less average maturity provides a more effective laddered yield when interest rates rise sharply.


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