Managing Reinvestment Risk When the Yield Curve is Inverted

David BlanchettBeware of investing in cash with a plan to extend maturities when the yield curve is no longer inverted. My research shows that this decision is historically difficult to time.

Cash can be an attractive fixed income investment during periods when the yield curve is inverted, like today. As of January 12, 2024, cash (defined as 3-month Treasury bills) had an annualized yield of 5.45% versus 3.94% for 10-year Treasury notes, a spread of 151 basis points. There is a spread difference of only 44 basis points between cash and core bonds, given a yield to maturity of 5.01% on the Bloomberg US Aggregate Bond Index.

While cash may seem risk-free, long-term investors face reinvestment risk: being forced to reinvest in bonds in the future with lower yields if interest rates fall. This is the conundrum facing investors questioning whether to pivot out of core bonds into cash.