PERSPECTIVE3-5 min to read

Cash offers flexibility, but it’s time to start thinking longer term

Investors have been investing in cash or cash equivalents due to the historic underperformance of fixed income markets and higher yields than certain longer-term bonds. However, with an economic downturn expected in 2023 or 2024, we believe adding longer dated bonds to lock in high yields could be a valuable move.



US Multi-Sector Fixed Income team

Given the historic underperformance of fixed income markets last year and the fact that cash yields more than certain longer-term bonds, many investors have invested in cash or cash equivalents. With the consensus outlook of an economic downturn in later 2023 or early 2024, we believe adding longer dated bonds, and therefore locking in high yields, could prove valuable going forward. We think investors may not fully appreciate the risks of continuing to overweight short-term investments or cash nor the yield cushion bonds currently offer against further price declines. Although an allocation to cash for flexibility is prudent, we believe it’s time to start thinking longer term.

Potential price appreciation

As 2022 proved, bond prices fall as interest rates rise. The converse is also true, bond prices rise as interest rates fall. This relationship between price and interest rates is known as duration. The greater the duration, the greater the potential for price appreciation when rates decline. With short term investments such as Treasury Bills (T-Bills) and cash there is essentially no opportunity for price appreciation. If the economy slows or if the Federal Reserve lowers interest rates, investors could earn higher returns in longer dated (non-cash) assets. The price of longer maturity bonds will increase more than the price of cash or short-term investments.

Reinvestment risk

If short-term interest rates fall, short-term investments or cash investors will need to reinvest at a lower rate, reducing future returns. When investors buy longer maturity bonds, they are exposed to less reinvestment risk. The market consensus on the most likely path for interest rates over the next twelve to twenty-four months is lower. While cash or a short-term investment may provide an attractive yield today, that yield, and therefore the income generated, may evaporate with little to no potential for capital appreciation as rates normalize.

Safe haven

When equity market volatility increases, investors often seek a lower risk investment alternative such as fixed income. This increasing demand causes the price of longer duration fixed income securities to rise. Therefore, cash or short-term investments deprive a portfolio of the equity hedge that longer-term bonds have historically provided.

Why not just buy T-Bills?

Although current yields of cash or short-term investments are attractive from a historical perspective, it is important to consider the additional returns available from other sectors, such as high-quality municipal bonds or investment grade corporate credit. As an example, over the last nine months if an investor had purchased longer maturity corporate bonds, they would have earned 4.92% more than just owning three- or six-month T-Bills.

Figure 1: The return on corporate bonds has been nearly 5% higher than the return on T-Bills

Cumulative returns since October-end chart

Figure 2: Cumulative returns since October-end (Index)

Cumulative returns since October-end

Source: Schroders, Bloomberg, Barclays Live, as of July 31, 2023. Bloomberg US IG Corporate Index, and Bloomberg US 3-6 Month Treasury Bill Index. Past performance is not a guide to future performance and may not be repeated.


A portfolio of intermediate or longer-dated bonds will maintain most of its attractive income-generating ability while also providing generous total returns as holdings in the portfolio appreciate during a falling yield environment. At current yields, bonds can absorb some pain if rates continue to rise without leaving investors with large losses. While cash and short-term investments still offer some value in terms of liquidity and optionality, we believe it is now time to start the process of rotating into high quality longer duration securities and locking in some of these attractive yields.

Interested to read more investment insights? Click here. 

Important Information:

This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). It is intended solely for wholesale clients (as defined under the Corporations Act 2001 (Cth)) and is not suitable for distribution to retail clients. This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group. The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document. Opinions, estimates and projections contained in this document reflect the opinions of the authors as at the date of this document and are subject to change without notice. “Forward-looking” information, such as forecasts or projections, are not guarantees of any future performance and there is no assurance that any forecast or projection will be realised. Past performance is not a reliable indicator of future performance. All references to securities, sectors, regions and/or countries are made for illustrative purposes only and are not to be construed as recommendations to buy, sell or hold. Telephone calls and other electronic communications with Schroders representatives may be recorded.


US Multi-Sector Fixed Income team


Economic views
Fixed Income
Interest rates
Market views
Our sales team is available to discuss with you any investment opportunities.
Follow us

This website is owned and operated by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473).  Your access to this website is subject to the Terms of Use found by clicking the ‘Important Information’ link below.  By using this website, you agree to be subject to these Terms of Use.