Judging ‘Cash’ vs. Bonds

When the question is bonds, some investors immediately ask another question: Why bother, when super-safe money market returns aren’t much lower than yields on five-year Treasury notes?

Indeed, the average money market fund now yields about 5% annually. That compares with 5.71% on a five-year T-note.

And with a money fund, should market interest rates rise, your yield would rise with the market. By contrast, a bond yield is fixed. If market rates rise, your yield stays the same, while the principal value of your bond declines in the open market (although if you hold the bond to maturity, those price fluctuations are irrelevant).

Still, consider the average total returns (interest earnings plus or minus changes in principal) of two major bond mutual fund categories, as tracked by Lipper Analytical Services:

The average U.S. government bond fund earned 32.2% in the five years ended Sept. 30. The average general bond fund, which may own Treasuries, corporate issues and other types of bonds, earned 47.7% in that period.

Compare those numbers to the returns on money market funds, which earned 22.8%, on average, in the period. The moral: “Cash” accounts such as money funds are safe, but safe usually means a much lower return over time than riskier options.