Rethinking Cash in Portfolio
Weekly Market Update
Takeaways
The Fed has maintained a 3.5% to 3.75% target rate this year, and markets now lean toward a rate hike before year-end. We still expect inflation to stay elevated, and Wednesday’s Consumer Price Index (CPI) print could push yields higher if it runs hot.
Many investors hold larger-than-normal cash balances, which were largely built after rates sat near zero and policy makers entered a hiking phase. That said, cash and some cash equivalents tend to underperform during inflationary periods, so cash may not be the safe haven it has historically been, given the current macro environment.
We view cash as playing three roles in portfolios: a potential source of liquidity, stability, and optionality. For those not yet ready to take on higher market risk, we favor high-quality, short duration fixed income, which has historically held up better than long duration when yields rise.
This Week in Charts
Looking Closer
From a historical context, nominal yields are high, but spreads across credit sectors remain at long-term lows. Therefore, we continue to focus on high-quality fixed income, such as U.S. government debt and investment grade bonds to potentially benefit from higher yields while minimizing credit and duration risk.
Market and Data Recap
Reframing cash in a higher-yield environment
Markets opened the week digesting renewed Middle East tensions, Friday’s sharp Tech selloff, and a strong jobs report. We note the selloff was narrow. The largest Tech names fell more than 5% on average, while the other 493 names in the S&P 500 declined approximately 1%.1 Defensive sectors such as Healthcare and Consumer Staples were positive.
Against this backdrop, our focus this week is on portfolios with large cash positions. In many cases, cash balances were accumulated after policy rates skyrocketed from levels near or below zero. Policy rates peaked in 2024, and while inflation has fallen, it still runs above target in many regions, yet cash balances have not come down materially.
Our view on inflation continues to play out. We expect price pressures to remain elevated across many major economies, with higher energy costs adding to an environment where inflation is already running above target (Figure 2). This dynamic is likely to be reflected in rising yields, particularly at the long end of the curve (Figure 3).
In this environment, we think cash merits a closer look. While recent volatility has made cash feel like a safe harbor, history shows that cash tends to lag other asset classes during inflationary periods. The sense of safety that cash has provided in recent years may prove less durable when inflation remains elevated. Holding sizable cash balances can feel prudent, but it comes with a meaningful opportunity cost relative to assets that seek to generate income or keep pace with rising prices (Figure 1).
Our goal is not to discourage holding any cash. Rather, it is to treat cash purposefully. We see three roles for cash. First, as a potential source of liquidity for capital calls and short-term obligations, which can help avoid forced sales of assets. Second, as a potential stabilizer, though we believe it rarely belongs in a portfolio as a material allocation. Third, for optionality, whether to fund a large purchase or buy a market dip. We note cash is highly sensitive to inflation and holding too much can erode a portfolio’s purchasing power over time. Each role carries an opportunity cost, particularly when yields on short-date instruments look more attractive than they did 12 months ago.
For those not yet comfortable shifting into higher risk assets, we see fixed income as the natural next step, and we favor short duration over long. Short-dated bonds have historically held up better than long-dated bonds when yields rise. This is consistent with our tactical asset allocation view, where we prefer high-quality, short-term fixed income to capture attractive yields while managing duration risk.
How much cash makes sense? We anchor the answer in the investor’s spending profile rather than a single number. We believe a 12-to-24-month view of spending and burn rate sets a sensible baseline, whether the investor draws an income from their portfolio, needs to fund a commitment, or plans a near-term purchase such as acquiring a business. Lines of credit can also stand ready, so investors are not forced to sell other holdings to meet a short-term obligation.
From there, we view cash, money market instruments, and short-dated fixed income as one broad group and seek to extend selectively along the duration and credit spectrum. We favor high-quality fixed income, including U.S. government debt and investment grade bonds, and we prefer short-term maturities of one-to-three years given the uncertain policy path. Nominal yields remain high in a historical context, but credit spreads sit near historical lows, which makes active management and security selection important.
Bottom line: We see a potential opportunity to put excess cash to work as yields stay attractive, and the policy path remains uncertain. Historically, cash underperforms during inflationary periods. We encourage investors to anchor cash holdings in their spending profile over a longer horizon, and treat cash, money market instruments, and short-dated fixed income as one group.
1 Bloomberg as of June 9, 2026.
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