Wealth managers see payoff in leaving cash as Fed hikes

The Federal Reserve's first rate hike in three years has made cash look more comfortable than ever. Three fixed income specialists say that is the wrong lesson for advisors to take. Higher bond yields, they argue, let investors lock in income for years without big bets on duration or reaching down in credit quality.

The Federal Open Market Committee voted 12–0 to raise the target range for the federal funds rate by a quarter point to 3.75% to 4% on Sept. 16, 2026, according to the Fed's official policy statement. It was the Fed's first rate hike since July 2023, and it came after three members dissented in favor of a hike in July, as recorded in the minutes of the July 2026 FOMC meeting. Most policymakers projected at least one more hike before year-end, and advisors are bracing for what could be the first of several hikes.

That leaves advisors fielding a familiar client question: why buy bonds when money market funds pay well? Three specialists say the cost of waiting for clarity is rising.

Why intermediate bonds are drawing fixed income managers

Erik Aarts, vice president and senior fixed income strategist at Touchstone Investments, favors the intermediate part of the Treasury curve. There, investors can collect meaningful income without the added interest-rate risk of the long end. Higher starting yields, he said, give portfolios far more cushion against rate swings than they had for much of the past decade. But heavy federal borrowing and rising private demand for capital could keep pressure on longer-term real yields. That demand includes spending on AI infrastructure. As a result, he is patient about extending duration aggressively.

"Our preference is therefore for measured duration exposure, concentrated in intermediate maturities, rather than making a large directional bet on where rates go next. We expect income, rather than price appreciation, to be the primary driver of bond returns in this higher-for-longer environment," Aarts said.

He added that investors don't need a "heroic duration call" to move beyond cash. The Treasury curve remains positively sloped, with notable steepening between cash-like maturities and the two- to three-year segment. Investors can add yield simply by stepping out incrementally.

"While we ultimately favor intermediate maturities, we think the more important decision today is to begin putting excess cash to work rather than waiting for perfect clarity from the Fed. Moving out the curve allows investors to lock in today's higher yields for longer, while cash yields can reset relatively quickly if short-term rates eventually decline," he said.

Miguel Laranjeiro, investment director for municipal debt at Aberdeen Investments, however, reaches a different structural answer. He sees value at the front end for income and liquidity. In municipals, he points to the 8- to 15-year range, where yields and roll-down potential remain attractive.

"We generally favor a barbell approach that combines shorter-maturity exposure with selective longer-duration positions rather than concentrating risk in the middle of the curve," Laranjeiro said.

What does staying in cash cost clients?

Money market funds still offer appealing nominal yields, Laranjeiro said. But they provide little room for capital appreciation, and their income can fall quickly once policy rates turn lower.

"By remaining entirely in cash, investors may miss the opportunity to lock in attractive yields that are available further out the curve today. In municipals, investment-grade bonds are currently yielding approximately 6.9% on a taxable-equivalent basis, levels that compare favorably with long-term historical averages and provide investors with an opportunity to secure attractive after-tax income," he said.

For Paul Bucci, partner and head of fixed income at Altium Wealth, a partner to Hightower Advisors, the client conversation often starts with disappointment. He said five-year returns through July 2026 have come in below 1% for three categories: intermediate U.S. government bonds, investment-grade corporates and high-quality municipals. That record has led some clients to question why they own bonds at all.

"When building a portfolio, starting yields are a good predictor of future performance when investors hold bonds to maturity. We can build a portfolio of high quality, intermediate term corporate bonds with an average yield over 5.5%," Bucci said.

That view lines up with recent research from FTSE Russell on starting Treasury yields. The research found that starting yields carry strong correlation with subsequent performance across Treasury maturities.

Bucci's main concern with cash is reinvestment risk. "If the Federal Reserve decides to cut short term rates next year, money market yields will quickly move lower and investors will have missed the opportunity to lock in higher yields for several years," he said.

The Fed's own projections point the other way in the near term, which could keep money market yields elevated a while longer. The managers' argument is less about timing the next move than about securing today's yields before the cycle turns.

High-yield spreads offer thin reward for credit risk

None of the three sees a need to take on much more credit risk. Aarts said high-yield spreads remain relatively tight. Investors are paid less for incremental risk, even though absolute yields look attractive.

"We continue to see attractive opportunities in high-quality corporate and securitized credit, where investors can earn additional yield while maintaining greater resilience if the economy slows," he said.

Bucci shares the concern. He noted that high-yield spreads sit near historically tight levels. Heavy corporate issuance in 2026 to fund AI-related capital spending adds to the risk that they widen. His answer is to diversify return drivers without dropping in quality.

"We would prefer to stay in higher-quality bonds while looking for different drivers of returns. This might include adding floating-rate securities, junior subordinated hybrid debt and short-dated convertible bonds to complement core positions in U.S. Treasuries, investment-grade corporate bonds, mortgage-backed securities and municipal bonds," Bucci said.

Laranjeiro is somewhat more open to credit. Investment-grade municipals yield roughly 6.9% on a taxable-equivalent basis, he said. High-yield municipals yield approximately 9.3%, a meaningful premium for investors willing to move down the spectrum selectively.

"We continue to see attractive opportunities in higher-quality segments of the high-yield market, particularly among BBB- and BB-rated issuers where investors can often earn additional income without taking on the risks associated with the lowest-rated credits. In our view, the key is selectivity and disciplined credit research rather than simply reaching for yield," he said.