High
interest
rates
have
been
a
boon
to
Americans
holding
cash,
but
many
on
Wall
Street
are
cautioning
investors
to
start
thinking
ahead.
People
have
been
piling
into
cash
vehicles,
such
as
money
market
funds
and
certificates
of
deposit,
since
the
Federal
Reserve
started
hiking
interest
rates.
Total
money
market
fund
assets
hit
a
record
$6.12
trillion
for
the
week
that
ended
on
Wednesday,
according
to
the
Investment
Company
Institute
.
Interest
rates
appear
to
be
staying
higher
for
longer,
with
the
Federal
Reserve
on
Wednesday
projecting
only
one
rate
cut
this
year.
Investors
may
be
tempted
to
stay
in
short-term
instruments
to
collect
higher
yields
—
the
Crane
100
Money
Fund
Index
has
an
annualized
seven-day
yield
of
5.12%
—
but
staying
there
presents
reinvestment
risk.
“If
short-term
yields
fall
in
the
future,
which
is
likely
with
Fed
rate
cuts
on
the
horizon,
then
those
5%-plus
yields
will
not
be
available
when
it’s
time
to
reinvest
the
funds,”
said
Kathy
Jones,
chief
fixed-income
strategist
at
the
Schwab
Center
for
Financial
Research,
in
her
mid-year
fixed
income
outlook
last
week.
Instead,
investors
looking
to
lock
in
yields
above
5%
for
a
longer
period
can
choose
investment-grade
corporate
bonds
or
government
agency
mortgage-backed
securities,
or
MBS,
she
added.
Agency
MBS
have
a
duration
of
about
six
years,
per
the
Bloomberg
US
MBS
Index
as
of
June
3,
Jones
noted.
Duration
is
a
measure
of
a
bond’s
price
sensitivity
to
fluctuations
in
interest
rates.
Bonds
with
greater
duration
also
tend
to
have
longer-dated
maturities.
Further,
the
coupon
yield
on
agency
MBS
is
at
roughly
5.7%,
a
level
that
is
“attractive
for
such
a
high-quality,
liquid
sector,”
according
to
Leslie
Falconio,
head
of
taxable
fixed-income
strategy
in
UBS
Americas’
chief
investment
office.
Turning
to
residential
mortgages
for
yield
Agency
MBS
are
part
of
the
overall
residential
mortgage-backed
securities,
or
RMBS,
sector.
RMBS
are
debt
obligations
created
out
of
a
pool
of
mortgages,
and
their
cash
flows
are
tied
to
the
interest
and
payments
on
those
loans.
Agency
MBS
are
backed
by
the
government
and
issued
by
agencies
Fannie
Mae,
Freddie
Mac
and
Ginnie
Mae.
Wells
Fargo
also
thinks
it’s
time
to
start
moving
money
out
of
cash
by
dollar
cost
averaging
—
or
adding
exposure
over
time
—
into
some
longer
duration
assets,
said
Luis
Alvarado,
global
fixed-income
strategist
at
Wells
Fargo
Investment
Institute.
Right
now,
the
residential
mortgage-backed
securities
sector
looks
attractive
because
of
its
relative
value
compared
to
investment-grade
corporate
bonds,
he
said.
The
firm
recently
upgraded
the
securitized
sector,
including
RMBS,
to
favorable
from
neutral
and
downgraded
Treasurys
to
neutral
from
favorable.
Investors
can
gain
exposure
to
MBS
through
exchange-traded
funds.
Alvarado
specifically
likes
high
quality
within
RMBS,
including
agency
and
non-agency
mortgages.
While
supply
is
expected
to
remain
flat,
he
expects
demand
to
grow
from
banks
as
their
loan
growth
decreases.
“We
believe
mortgages
(RMBS)
are
going
to
be
a
great
recipient
of
flows
because
they
still
provide
you
with
high
credit
quality,
plenty
of
liquidity
and
a
relative
advantage
to
IG
corporates,
especially
on
spread
differentials,”
he
said.
UBS
also
likes
agency
mortgage-backed
securities
right
now.
The
interest
rate
volatility
of
the
past
year
has
weighed
on
the
sector,
causing
it
to
lag
its
corporate
counterparts,
said
Falconio.
That
has
led
to
them
being
cheap
compared
with
BBB
corporate
bonds,
she
noted.
UBS
America’s
chief
investment
office
is
anticipating
a
soft
landing
and
two
Federal
Reserve
rate
cuts
this
year,
but
Falconio
said
it
doesn’t
necessarily
matter
whether
it
is
one
or
two.
“We
just
need
for
them
to
a)
cut
this
year
and
b)
ensure
that
the
probability
of
a
hike
is
pretty
much
off
the
table
—
and
it
is,”
she
said.
Agency
MBS
are
also
AAA-rated,
she
pointed
out.
“That
asset
class
will
do
very
well
going
forward,”
Falconio
said.
“Corporates
[spreads]
are
tight
…
it’s
a
high
quality
asset
class
that
you’re
earning
5.7[%]
yield,
and
the
spreads
are
almost
one
standard
deviation
cheap
for
the
current
coupon,”
she
added.
“And
we’re
at
the
part
of
the
cycle
where
the
Fed
is
going
to
start
to
pivot
to
a
cut
—
and
that’s
going
to
help
the
sector
as
well.”
