For much of the past two years, holding cash felt like a rational long-term strategy. Money market funds offered yields of around 5%, and investors were paid to hold cash. Some investors found it particularly attractive after enduring years of near zero short-term rates. That environment has now changed, and the shift is structural rather than temporary.
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Why Money Market Yields Are Falling
Last week, the Federal Reserve cut its benchmark interest rate for the third time this year, bringing the target range down to 3.5%–3.75%. This follows a peak of 5.25%–5.5%, which persisted from July 2023 through September 2024.
Money market yields closely track the Federal Reserve’s benchmark rate. When policy rates exceeded 5%, money market yields followed suit. As the Fed pivoted toward easing in late 2024, money market rates began to decline. Entering this year, most funds were already yielding below 5%, and today many are offering yields closer to 3.5% or lower.
This relationship is neither surprising nor unusual. Money market funds are designed to reflect prevailing short-term interest rates with minimal risk.
A Return to Long-Term Reality for Cash
While a 3.5% yield may feel underwhelming compared to last year, it remains attractive when viewed through a longer historical lens. During the pandemic, money market yields were effectively zero. In the year preceding COVID, yields hovered around 2%.
More importantly, today’s levels are far more representative of what money markets typically deliver over time. Money market funds tend to provide returns that approximate inflation, preserving purchasing power but rarely compounding real wealth. That makes them an excellent store of value, but a poor investment vehicle for long-term capital growth.
Fixed Income Now Offers Better Risk-Adjusted Income
As money market rates fall, fixed income once again becomes the more compelling option for investors seeking income with lower risk than equities.
The current Treasury yield curve is upward sloping; short-term rates are lower than long-term rates, and investors are compensated for taking on the additional duration risk.
- The 3-month Treasury yields approximately 3.6%
- The 10-year Treasury yields roughly 4.2%
This is a healthy and rational market structure. There is a time value for money, and therefore the longer you loan your funds, the more you should be compensated.
At the same time, this environment warrants caution. Products advertising 5%+ returns with “no risk” should be scrutinized. Those returns were normal when policy rates were at multi-decade highs. Today, they often imply hidden risks — such as leverage, credit exposure, or investments in lower-quality (“junk”) bonds.
Where Money Market Funds Still Make Sense
This does not mean money market funds have lost their utility. They remain an effective tool for short-term cash needs, emergency reserves, and funds earmarked for near-term spending. Their liquidity, stability, and modest yield make them ideal for capital that must remain accessible.
What has changed is their role in a long-term portfolio. Parking cash indefinitely in money markets should not be viewed as an investment strategy. It is a liquidity strategy.
Bottom Line
The era of earning almost equity-like returns with near zero risk is over. As interest rates normalize, investors must recalibrate expectations and reallocate accordingly. Money markets remain useful, but fixed income is once again the more appropriate tool for generating sustainable income and long-term portfolio stability.
For informational and educational purposes only.
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