Exiting Cash and Moving into Bonds

In recent years, especially during COVID and the subsequent interest rate hikes, many investors increased their cash allocations. While holding large cash positions can be a solid defensive strategy in volatile markets, the landscape has evolved. In 2022, when both equities and bonds delivered negative returns simultaneously for the first time in decades, cash offered stability. However, as inflation cools and central banks edge closer to rate cuts, high-quality bonds are emerging as a reliable ballast for portfolios.

A common question from investors is: with 1-year cash term deposits still delivering close to 5%, why consider bonds yielding around 5.5%? The key point is that the Fed has already begun its rate-cutting cycle, and the RBA is likely to follow suit in the first half of next year. In a year, when that term deposit matures, reinvesting at the same rate may not be an option. In contrast, an investment-grade bond portfolio can continue to yield 5-6% for many years, offering consistent returns.

Below are some examples of longer-duration, high-quality debt instruments. Given the longer duration of these debt instruments, if yields move down 1% from here, there will be a corresponding 10 increase in price, assuming an average duration of 10 years.

Government

High Quality Debt