Cash Has Been a Better Portfolio Diversifier than Treasurys, Morningstar Finds. Where to Nab Attractive Yields

Why It Matters

Cash’s low correlation with equities lets investors de‑risk portfolios without sacrificing yield, reshaping asset‑allocation strategies in a rate‑steady environment.

Key Takeaways

• Cash funds hold $7.64 trillion in assets.
• 7‑day money‑market yield averages 3.45%.
• Cash shows lowest three‑year correlation with stocks.
• Treasury‑bond correlation with equities rose to 0.65 by 2025.
• High‑yield savings and CDs offer 4% APY.

Pulse Analysis

Morningstar’s analysis underscores a shift in how investors view cash. Once relegated to a low‑return placeholder, cash‑equivalent vehicles now command $7.64 trillion and deliver a 3.45% annualized seven‑day yield, making them attractive for short‑term income. This influx reflects a broader search for stable returns as the Federal Reserve has paused rate cuts, leaving cash yields comfortably above pre‑2022 levels. The data also reveal cash’s superior diversification profile, with the lowest three‑year correlation to U.S. equities, positioning it as a reliable ballast amid market turbulence.

The report highlights a dramatic change in bond‑stock dynamics. Long‑duration Treasury bonds, which traditionally offered negative correlation, moved to a 0.65 positive correlation with equities by the end of 2025, reducing their effectiveness as a hedge. This divergence stems from the Fed’s aggressive rate hikes in 2022, which altered the risk‑return landscape for high‑quality bonds. Consequently, portfolio managers are re‑evaluating the role of Treasurys and turning to cash, whose performance remains largely insulated from economic growth swings, to preserve downside protection.

For practitioners, the practical takeaway is clear: a diversified cash strategy can enhance returns while mitigating risk. Money‑market funds provide immediate liquidity with yields around 3.45%, while high‑yield savings accounts and online‑bank CDs now offer up to 4% APY. Short‑term Treasury bill ETFs such as SGOV and BILS deliver comparable yields with minimal expense ratios. Investors should match maturities to cash needs, consider CD ladders for predictability, and ensure dividend sweeps are reinvested to avoid low‑interest drag. By integrating these cash instruments, investors can capture attractive yields and maintain portfolio resilience in an uncertain rate environment.