Should I Stay (Short-Term) or Should I Go (Long-Term)?

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

This week’s discussion is a follow-up to last week’s overview of the elongation of the economic cycle. There are many mitigating factors affecting the economy, some of which can sway sentiment, influence economic data releases, and ultimately interest rate direction. Amassed liquidity is impacting the economy and individuals’ financial positions. The following chart bears repeating as it displays the vast cumulation of money market funds - a cash alternative. Is this a strategic position or one of uncertainty?

There is over $6 trillion in taxable and tax-exempt money market funds which is nearly double the 20-year average. Uncertainty can trigger an investor’s investment choice as they opt for a sort of “parking place” with their money while seeking out a more profitable long-term plan. Oftentimes, investors equate “short” with being more conservative. In reality, staying short is not necessarily conservative. The only way to know whether the maturity of an investment is conservative or not is to know what interest rate the future will bring. Since I can safely say that none of us can always accurately predict the future, staying short-term becomes a statement of choice.

Should I stay short-term or go long-term

Think of it like this. If you absolutely, without any doubt or space for error knew that interest rates would be lower over the next 5 years, staying short becomes risky because you absolutely know your maturing asset will be reinvested in a lower-earning asset. The “conservative” investment choice under these conditions, would be to lock in for at least 5 years; therefore, being locked into the highest return possible over the period. Staying short-term or long-term is in essence a call on future interest rates.