There is now close to a universal consensus view that the Federal Reserve will cut interest rates at least once before the end of the year. Based on the CME Group’s FedWatch tool, the market is currently pricing in virtually a 100% probability that the Fed will lower its target interest rate range by at least 25 basis points (if not 50 basis points) at its next meeting on Sept. 17, 2025. Many observers expect additional rate cuts in October and December, with the three rate cuts totaling 75 basis points or more.
With that as the backdrop, asset management firms such as Morgan Stanley and MFS have been advocating buying bonds further out on the yield curve. Doing so could lead to better returns in a falling rate environment as well as an opportunity to capture higher yields: Treasury bonds maturing in 20 or 30 years now sport yields of about 4.70%, compared with about 4.25% at the front end of the yield curve and 3.50% in the two- to three-year maturity range.
But for investors with short time horizons, I’d argue that keeping assets on the short end of the yield curve—and in cash specifically—is still the best approach. Even investors with longer time horizons should still think twice about buying long-duration bonds.
Cash Yields Are Still Attractive
A year ago, the yield curve was more inverted, meaning that yields on short-term securities were actually higher than those with longer maturity dates. That’s no longer the case; the yield curve now has more of a V shape, with relatively high yields at the short end that drop off and then sharply increase after the three-year maturity mark.
As mentioned above, you can still get a little extra yield by buying bonds with maturity dates 20 or 30 years into the future. But that incremental yield isn’t all that generous compared with historical norms. The yield on the 30-year Treasury was roughly 60 basis points higher than that of the three-month T-bill as of Aug. 30, but the difference between the two yields averaged about 2 percentage points over the past 44 years or so.
Moreover, cash yields remain comfortably ahead of inflation. Barring a sharp decline in rates or a large uptick in inflation, yields on cash are high enough to give short-term savers a buffer against losing purchasing power to the ravages of inflation. That should remain the case even if most of the rate cuts the market is currently expecting materialize.
Rate Cuts Aren’t Guaranteed
Granted, any potential rate cuts would render cash less attractive than it is now. But it’s still more prudent for investors to take a conservative approach to saving for shorter-term goals. For one, there’s no guarantee that the Fed will follow through on the rate cuts that are now widely expected. As Dan Lefkovitz detailed in a recent article, interest rates are notoriously difficult to forecast. In early 2024, the market was expecting as many as seven rate cuts by the end of the year, with the decreases totaling 175 basis points. But because economic growth remained strong, the Fed ended up cutting rates only three times in 2024, with a total reduction of 75 basis points.
Moreover, it’s worth bearing in mind that the Federal Reserve has a dual mandate to both maximize employment and stabilize prices. The current unemployment rate of 4.3% remains well below the long-term average of 5.7%. Meanwhile, inflation remains well above the Fed’s 2.0% target rate (and ticked up to 2.9% for the most recent reading). Those numbers don’t make an overwhelming case for aggressive interest rate cuts, in my view.
In addition, the longer end of the yield curve isn’t directly tied to Federal Reserve policies. In 2024, for example, yields on the 10-year Treasury actually finished the year at a higher level (4.58%) than where they started (3.95%). Yields on longer-maturity Treasuries have also edged up at various points in 2025, driven by market worries over ballooning debt levels and whether hefty levels of debt issuance are sustainable. As a result, the Morningstar US 10+ Year Treasury Bond Index lost about 4.6% over the trailing 12-month period ended Aug. 31, 2025.
Even Ultrashort Isn’t Ultrasafe
Even relatively safe securities aren’t totally immune to potential losses. As I discussed in a previous article, even ultrashort bond funds can suffer losses at times. The average fund in that Morningstar Category lost about 8.4% during the financial crisis in 2008 and 1.8% in the first quarter of 2020. Because of their somewhat spotty history, ultrashort bond funds aren’t the best holding for short-term cash needs. As detailed in Morningstar’s Role in Portfolio framework, they’re more appropriate for investors with a time horizon of at least one to two years.
So if you’re saving for a shorter-term spending need, keeping assets in cash is the most prudent approach. The table below highlights the pros and cons of some of the main options for stashing cash assets.
At the end of the day, investors are better off remaining laser-focused on their own time horizon and goals, regardless of what the Federal Reserve ends up doing with interest rates.
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