Chart of the Week

Cash can play an important role in any financial plan. It provides liquidity for emergencies and short-term expenses, and it may serve as “dry powder” for investment opportunities. However, many investors today keep extra cash beyond liquidity needs in money market funds given their short maturity and attractive yields.

The chart above demonstrates the risk of keeping excess cash in ultra-short-term maturities. Money market funds have historically been tightly correlated with the federal funds rate, and we anticipate that the Federal Reserve (Fed) will continue to cut rates in 2026, with yields falling in sync. As money market funds offer little ability to lock in yields at current levels, we believe investors should examine these allocations as well as other cash-alternative holdings.

We believe the role of cash alternatives in a portfolio should primarily be in service of liquidity needs. In our view, investors with excess cash in these instruments may want to consider locking in today’s rates with intermediate-term bonds (in the three- to seven-year range) and a little more credit risk. We are therefore favorable on both U.S Intermediate Term Taxable Fixed Income and U.S. Taxable Investment Grade Fixed Income.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation, and other risks. Prices tend to be inversely affected by changes in interest rates. Cash alternatives typically offer lower rates of return than longer-term equity or fixed-income securities and provide a level of liquidity and price stability generally not available to these investments. Some examples of cash alternatives include: bank certificates of deposit; bank money market accounts; bankers’ acceptances, federal agency short-term securities, money market mutual funds, Treasury bills, ultra-short bond mutual funds or exchange-traded funds, and variable rate demand notes. Each type of cash alternative has advantages and disadvantages which should be discussed with your financial advisor before investing.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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