Macro

Goldman Advises Shifting from Cash to Bonds as Fed Rate Cuts Loom

Goldman advises shifting $6.15 trillion from cash to corporate bonds as Fed rate cuts loom.

By Max Weldon

7/10, 15:15 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Goldman Sachs Access Investment Grade Corporate Bond ETF
SPDR Portfolio Intermediate Term Corporate Bond ETF
iShares Broad USD Investment Grade Corporate Bond ETF
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Key Takeaway

  • Goldman Sachs advises shifting from cash instruments to investment-grade corporate bonds and high-yield securities as Fed rate cuts loom.
  • Investment-grade corporate bond ETFs like USIG, SPIB, and GIGB offer yields over 5%, with Rosner favoring large bank bonds.
  • High-yield opportunities exist in B and BB-rated industrials and energy sectors, offering yields of 7% to 8%.

Shift in Cash Strategy

Investors who have enjoyed high yields on cash instruments like Treasury bills and money market funds should start preparing for a strategic shift, according to Goldman Sachs. The annualized seven-day yield on the Crane 100 list of the 100 largest taxable money funds, which hit a high of 5.20% at the end of last year, is now slightly lower at 5.12%. As of July 2, approximately $6.15 trillion is sitting in money market funds, according to the Investment Company Institute. However, this scenario is expected to change once the Federal Reserve begins cutting rates. Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset and Wealth Management, highlighted the "real probability" of rate cuts starting in September. "As soon as the Fed starts cutting 25 basis points, maybe at a quarterly pace, that rate that you have been receiving in your cash surrogate — your money market fund, your T-bill and $6 trillion is sitting there earning that — that’s going to evaporate," Rosner said. She emphasized the need to move out of T-bills and money markets and into investment-grade corporate bonds or funds holding below investment-grade securities.

Corporate Bond Opportunities

Rosner recommends shifting investments into corporate bonds, particularly those issued by large banks and sectors that perform well throughout economic cycles. She sees value in both investment-grade and selectively chosen high-yield bonds. For investment-grade bonds, Rosner favors large bank bonds, while in the high-yield space, she prefers industrials and energy sectors. "There are pockets of the high-yield market that are very attractive. Default rates are really low," she noted. Rosner also pointed out that many corporations have strengthened their financial positions since the financial crisis by extending their debt maturities and lowering interest costs. Within high-yield bonds, she prefers issuers rated B and BB by credit agencies, where she has confidence in the business models and management teams. "We’re being compensated," for the added risk, she said. "We’re able to take advantage of that all-in yield with a 7% or an 8% handle, which is really, by the way, exciting." However, she is cautious about CCC-rated bonds, despite their high yields, due to concerns about the viability of their business models.

Structured Products and Active Management

Rosner also sees potential in high-quality structured products, which offer access to pools of loans or commercial mortgages that are structured to provide high yields and spreads while offering protection. "[You] get access to a pool of loans or a pool of commercial mortgages that are tranched and set up in a fashion that you can earn a lot of yield, earn a lot of spread and be protected via the structure," she explained. However, she stressed the importance of having an active manager to help build out a portfolio, given the complexities and risks involved in these investments.

Street Views

  • Lindsay Rosner, Goldman Sachs Asset and Wealth Management (Cautiously Optimistic on fixed income investments):

    "As soon as the Fed starts cutting 25 basis points, maybe at a quarterly pace, that rate that you have been receiving in your cash surrogate — your money market fund, your T-bill and $6 trillion is sitting there earning that — that’s going to evaporate. There is income in fixed income, but it will require in the next months or quarters to move out the curve."

  • Lindsay Rosner, Goldman Sachs Asset and Wealth Management (Bullish on investment grade corporate bonds):

    "There are pockets of the high-yield market that are very attractive. Default rates are really low... All of these corporations really got religion from the financial crisis ... they used the very low interest rates that we were experiencing a couple years back to term out their debt and lower their rate of interest or their costs on their balance sheet."

  • Lindsay Rosner, Goldman Sachs Asset and Wealth Management (Neutral on CCC-rated bonds):

    "We’re being compensated for the added risk... We’re able to take advantage of that all-in yield with a 7% or an 8% handle, which is really exciting."
    "[You] get access to a pool of loans or a pool of commercial mortgages that are tranched and set up in a fashion that you can earn a lot of yield, earn a lot of spread and be protected via the structure."