Should I put more of my fixed income allocation into money market funds?

Should I put more of my fixed income allocation into money market funds?

Relatively high short-term interest rates may have investors wondering why their fixed income allocation should comprise anything other than money market funds. But yield curves can change quickly, which means the bonds offering the highest expected returns can change too.

Consider the yield curve on September 29, 2022 and the yield curve on March 29, 2023 (Exhibit 1). The difference, with only six months in between, illustrates just how dynamic the bond market can be.

Source: US Department of Treasury. | Past performance is not a guarantee of future results.

On September 29, the one-year US Treasury yield was 1.2 percentage points higher than the one-month yield. By March 29, the yield difference between the same points was down to just 25 basis points.

The performance since 1990 of two Dimensional fixed income funds focused on different types of short-term bonds (see Exhibit 2) offers more support for fixed income allocations that go beyond money market funds.

Fixed income managers with the ability to monitor real-time changes and dynamically position strategies to take advantage may help investors navigate volatile markets and improve their odds of having a better investment experience.

Money markets represented by the Money Market (Taxable) Morningstar category average. Fixed income funds and money market funds shown have different investment universes, durations, and credit risk profiles, with funds generally considered relatively riskier. Money Market (Taxable) Morningstar Category portfolios invest in short-term money market securities in order to provide a level of current income that is consistent with the preservation of capital. Dimensional funds focus on total return. See below for: Standardized Performance Data. Data for Dimensional funds sourced from Dimensional and data for the Money Markets (Taxable) Morningstar Category sourced from Morningstar. Chart represents the number of rolling periods where the fund outperformed money markets divided by the total number of periods. There are 386 overlapping 1-year periods, 362 overlapping 3-year periods, and 338 overlapping 5-year periods.

Source: Dimensional Advisors