Have we reached the end of “T-Bill and Chill”? 

By Jim Ewing on December 21, 2023

After many years of zero interest rate policy, as you are undoubtedly aware the Federal reserve increased the Fed Funds rate to five and a half percent in an attempt to slow the rate of inflation.  A silver lining of these rate increases is that savers can finally earn a competitive return on conservative investment options such as savings accounts, money markets, CD’s and treasury bills. 

Higher Interest Rates = Better Yields on Your Savings   

With many short-term cash alternatives yielding more than 5%, investors have poured trillions of dollars into these options, to take advantage of the opportunity to earn a real rate of return with very little risk.  The rotation into cash and cash-like instruments has been so profound that a new term was created and has been frequently heard in the financial press: “T-Bill and chill.”   

Should You Continue to “T-Bill and Chill”? 

After experiencing historic levels of volatility over the past six years, it is certainly understandable that investors want to sit out some of the drama and earn an attractive yield while they wait for financial conditions to return back to “normal,” if there is such a thing.  Now that inflation is showing signs of steady decline and the economy is beginning to slow, many are speculating that the Federal reserve has completed the process of increasing rates. In addition, markets are beginning to price in the expectation that the Fed will begin to decrease rates at some point next year.  

The Outlook for Interest Rates May Be Changing 

If short-term interest rates have in fact peaked, is it the wisest course of action in this climate to continue to overweight money markets and CD’s?  What does history tell us?   

The attached chart shows the subsequent returns one year after interest rates peaked during the last six cycles of interest rates increases, spanning the past forty years.  In five of the six occurrences (or 83% of the time) the S&P 500 was higher by an average of over 20% just one year later!  Furthermore, this outperformance doesn’t just apply to the stock market.  In all six occurrences if investors had allocated to investment grade bonds, they would have achieved positive returns; and in five of the six occurrences, high yield bonds achieved positive returns. Investment grade bonds increased by an average of 14.6% and high yield bonds increased by 12.3%, respectively. 

Lower Interest Rates = Beneficial for Both Equities and Fixed Income 

We aren’t predicting the end of volatility in the short term.  Nor are we advising clients to move all of their savings balances out of high-yielding money markets or to take early withdrawals on all of their CD’s at this time.  We are simply reminding each of you that when interest rates decline, both equities and fixed income tend to rise.  So, by all means keep your emergency fund in appropriately conservative and liquid holdings.  To fund your intermediate and long-term goals, however, we recommend that you keep your portfolio invested in a risk-appropriate diversified portfolio, and continue to add to these accounts as cash flow allows.   

Should you have any questions about your allocation or if you would like to confirm your risk-tolerance, don’t hesitate to reach out to our team.