As global central banks continue to raise rates this year, investors are faced with new considerations related to yield, price stability and liquidity following the past two years’ ‘lower-for-longer’ yield environment. Not all liquidity investment vehicles will respond the same way as interest rates rise. We encourage cash investors to reevaluate their investment allocation keeping in mind how different investment vehicles may respond to rising interest rates.
We believe investors may want to consider money market funds (MMFs) as an alternative to bank deposits in today’s rising rate environment. Although bank deposits have sometimes offered incremental yield over MMFs in the lead up to past rate hiking cycles, it historically hasn’t taken long for MMFs to surpass them.
Yield on cash was especially hard to come by during the last two years’ low interest rate environment. As a result, yield had not been a point of differentiation between MMFs and bank deposits. Rate rises should change that, as they are expected to increase yield potential for cash investors and cause spreads between MMF yields and bank deposit rates to widen.
Some bank deposit rates may exceed MMF yields in the early stages of a rate hiking cycle. However, it is important to keep in mind that bank deposit rates have historically lagged rate hikes and MMF yields once a hiking cycle is underway. During the last cycle, which began in late 2015, bank deposit rates exceeded the federal funds for about a month after the Federal Reserve’s first rate hike. But by early 2019, there was about a 200-basis-point difference between the average yield on MMFs that invest in US government debt and the national deposit rate for 3M CDs (see figure 1).
This difference is largely attributable to the structural differences between MMFs and bank deposits. MMFs are diversified portfolios of highly liquid assets, while bank deposits are unsecured liabilities on banks’ balance sheets. While rate hikes are reflected in the assets held by MMFs (subject to the underlying portfolio positioning), deposit rates are dictated entirely by individual banks. This means that depositors’ yield potential is inherently constrained by banks’ balance sheet and funding needs. For this reason, our view is that investors seeking to capitalize on increases in global central banks’ policy rates should consider MMFs for their cash.
 Source: Goldman Sachs Asset Management, Federal Reserve. For illustrative purposes only. October 2015-July 2019 represents the most recent rate hiking cycle. The national rate is calculated by the FDIC as a simple average of rates paid by all insured depository institutions and branches for which data are available based on the $100,000 tier for jumbo accounts. The iMoneyNet US Government & Agencies Index is an average of the 7-day SEC yields of all Rule 2a-7 government and agencies MMFs. The iMoneyNet USD Public Debt CNAV Index is an average of the 7-day current yields of all offshore USD Treasury MMFs.
As cash investors balance the desire for principal stability, liquidity and yield, it is important to remember that the market typically only allows for two of these goals to be achieved at one time, often at the expense of the third. In determining how to allocate cash, we believe it is important for investors to consider how the features of bank deposits and MMFs may help them meet these objectives.
 Source: Goldman Sachs Asset Management. For illustrative purposes only. There is no guarantee that objectives will be met.  Diversification does not protect an investor from market risk and does not ensure a profit.
Goldman Sachs Asset Management MMFs are structured as open-ended investment companies. Open-ended investment companies are owned by their shareholders (i.e., the investors) and are not owned directly or indirectly by Goldman Sachs & Co. LLC or its affiliates, including Goldman Sachs Asset Management, L.P. In the event that Goldman Sachs Asset Management, its affiliates or the fund’s custodian (Bank of New York Mellon) became insolvent, the MMF’s assets would not be impacted. By contrast, bank deposits, which are liabilities on a bank’s balance sheet, would be subject to traditional proceedings whereby an investor would join a list of creditors in the event of bankruptcy.
If you have any further questions regarding rising interest rates or require more information on how we can help, please contact your Goldman Sachs Asset Management representative.