Ultrashort Bonds vs. Cash: Understanding the Trade-Offs

Ultrashort bond funds may offer more income than cash equivalents while limiting, but not eliminating, interest-rate and credit risks.

• Cash-equivalent yields have declined since the Federal Reserve began cutting rates in late 2024, reducing the ability of cash holdings to preserve purchasing power after taxes and inflation.
• A $1,000 cash investment earning 3% generates $30 over one year, but 3% inflation can offset much of that gain before taxes.
• The authors expect the federal funds rate to remain near 3.75% to 4% in the near term because inflation remains above the Fed’s 2% target, while the labor market and economic growth remain fairly stable.
• Bond yields have also been supported by resilient growth, persistent inflation, reduced Fed forward guidance, rising federal debt and increased corporate issuance, including by AI-related companies.
• Ultrashort bonds produced higher average yields than three-month Treasury bills over the period from 7/31/2006 to 8/31/2026, but their prices fluctuate and they carry more interest-rate and credit risk than money market funds.
• Interest-rate volatility remains elevated: the MOVE Index averaged 99 over the five years through July 31, 2026, versus 67 over the preceding 10 years; nevertheless, a hypothetical fund with a 5% yield and 0.3-year duration would have a relatively tight total-return range for a 0.5-percentage-point rate move.

Takeaway: Investors seeking income beyond cash may consider actively managed ultrashort bond funds, but the potential for higher yields comes with fluctuating share prices and greater interest-rate and credit risk than cash equivalents.