Despite the Federal Reserve’s expected rate cut next week, Americans are continuing their love affair with cash. However, experts warn that they need to make some moves if they want to lock in attractive returns. Assets in money market mutual funds reached $6.3 trillion in the week ended Wednesday, another record high, according to the Investment Company Institute. The funds have attracted inflows due to their favorable payouts. The 7-day annualized return on the Crane 100 list of the 100 largest taxable funds is currently 5.08%. Bank of America predicts these inflows will continue, even as the Federal Reserve begins to cut interest rates. The central bank is scheduled to meet Sept. 17-18, and more than 70% of traders expect a quarter-percentage point cut in the federal funds rate, according to CME Group’s FedWatch Tool. The remaining traders believe it will be a 50 basis point cut. “Fed rate cuts unlikely to unlock MMF cash unless rates < 2%. Fed cuts will see MMF inflows slow but outflows unlikely unless cuts much deeper than market expectations," he wrote in note last week Bank of America chief Mark Cabana. History shows that when investors leave money market funds, they move into fixed income versus equities, he said. Institutional investors will also continue to move into money market funds as the Fed cuts interest rates because any cash they have in direct money market investments, such as Treasuries, will be hit by rate cuts faster than money market funds , explained Peter Crane, founder of Crane Data, an industry tracking company. "Money-fund yields follow the Fed, so they should drop by 25 basis points in the month following any Fed move," Crane said, using the assumption that the central bank would cut by 25 basis points. Making a move Experts have warned investors against holding too much cash. Instead, understand how much you might need for an emergency, as well as any money you want liquid for future opportunities or purchases, said Ted Jenkin, certified financial planner and founder of oXYGen Financial. In this case, you can leave money in liquid assets such as money markets or high-yield savings accounts. For cash that can be locked away a little longer, consider certificates of deposit, but act sooner rather than later, he said. "If you want to maximize your cash return for the next 12 months, it's probably best to lock in 9-month or 12-month CD rates," said Jenkin, a member of CNBC's Financial Advisor Council. "They're at the peak they're going to be as the Fed is going to cut rates over the next 12 months." CD rates have already fallen, with American Express and Bread Financial cutting 12-month rates last week, according to BTIG. The company believes banks are pushing customers towards savings accounts, which have interest rates that are not locked in. However, the payouts remain attractive. Bread Financial remains at the top of the list with an annual percentage return of 4.9%. Once you've set aside adequate cash needs, consider moving any excess funds into fixed income, Jenkin said. "This is a great time to increase your bond duration," Jenkin said. It extends over five and 10 years and likes investment-grade corporate bonds. So does UBS's Leslie Falconio, who calls the 4½- to 5-year portion of the curve the "sweet spot." "We had record corporate investment grade issuance in the first week of the month, but investor demand is still there," he said. Assets have a lot of inflows and investors are able to get a good return with a high-quality asset, added Falconio, head of taxable fixed income strategist at UBS Americas chief investment office. She also likes agency mortgage-backed securities, which is a high-quality, liquid sector. The products are debt obligations issued by agencies whose cash flows are tied to the interest and payment of a group of mortgage loans, such as Fannie Mae, Freddie Mac and Ginnie Mae. They are considered low credit risk because they are backed by the US government. "It's not like we think there's going to be a problem in terms of defaults or high-yield issues, we just think they're very narrow," Falconio said. Another place for investors to look is preferred stocks, which tend to do very well when interest rates fall, according to Jenkin. Securities are a hybrid product — they trade on exchanges like stocks, but have a face value and pay income like bonds. "This is the forgotten asset class," he said. "It's a good time to own them because they will continue to pay solid returns and also see price appreciation."
