cash investment?

Under the Capital Market Expectations reading, one of the topics is economic conditions and asset returns. The first topic/asset class is cash investments. It says that when interest rates rise/are expected to rise, the manager holding 9-mos cash investments should reallocate into 3-mos cash holdings.

Am I missing an obvious explanation here! What’s the explanation for this plan of action, why invest in shorter maturity cash-like assets when expecting rates to rise?


when interests are expected to rise (like now over a longer term horizon) it is appropriate to avoid longer maturities and so not have a long duration (or even be short duration depending on how imminent you think the rise in interest rates will be). if you purchase bonds of longer maturity now, their price is going to fall when interest rates increase; moroever new bonds issued when rates have risen will likely have a higher YTM to stand a chance of attracting buyers

you dont want to have bond portfolio as rates increase due to inverse yield/price relation. As rates set to increase better to go short term cash…And as rates have increased significantly (economic expansion period) so does the yields on the new issues…Now you can invest in bonds

Ok. I’m on board with that. Didn’t know if there was some other explanation behind the seens.

Are we supposed to assume that the rate on the investment is fixed? If variable, I’m not sure i’d necessarily reach the same conclusion (to sell, ie).