Investors waiting for cash and money market funds may consider switching to longer-dated bonds sooner rather than later, according to Saira Malik, chief investment officer at Nuveen.

A look at historical returns shows that the broader $55 trillion US bond market has typically outperformed short-dated Treasuries at the end of past Federal Reserve rate-hiking cycles since the 1990s.

The bond market has returned an average of 5.5% over the last four Fed rate hike cycles over three months after the last rate hike (see chart), while short-dated government bonds have returned 2.1%.

This data includes the three-month moving average bond performance in all Federal Reserve interest rate hike cycles since 1990 (1995, 2000, 2006 and 2018) based on the Bloomberg US Aggregate Bond Index and the Bloomberg US Treasury 1-3 Year Index

Bloomberg, Nuveen

Notably, when looking at the performance of the Bloomberg US Aggregate Bond Index versus the Bloomberg US Treasury 1-3 Year Index, the magnitude of the bond market’s outperformance relative to short positions eased by 12 months.

“The broad market typically saw a strong recovery rally immediately after the Fed pause and outperformed for most of the following year,” Malik said in a note to clients Monday. “This lends even more credence to our view that over-allocation to cash or short-dated government bonds could be a mistake – and that investors may want to start closing their duration underweights.”

Individuals can invest in Wall Street bond indices through equivalent exchange traded funds, including the iShares Core US Aggregate Bond ETF AGG and the SPDR Bloomberg 1-3 Year US Treasury Bond UCITS ETF UK:TSY3, for short-term Treasury exposure.

Fed Chair Jerome Powell hinted in his speech at the annual meeting on Friday that further rate hikes may be needed to keep the US cost of living in decline, even as interest rates are already at a 22-year high and inflation has fallen sharply over the past year meeting in Jackson Hole Wyoming. He also reiterated his promise to keep interest rates at restrictive levels for a while to keep inflation under control.

Malik pointed out that the slowdown in housing inflation is a positive sign on the inflation front. Homebuyers have retreated as the benchmark 30-year mortgage rate averaged 7.31%, the highest since 2000.

She also expects US economic growth to slow and the 10-year Treasury yield BX:TMUBMUSD10Y to “partially decline” after rising in recent weeks.

“Historically, the 10-year yield peaked in the last few months after the last rate hike in a tightening cycle. We expect that hike to come at either the September or November Fed meeting and that the 10-year yield will come down by the end of the year.” Yields and debt prices move in opposite directions.

Related: Pimco emerges as buyer in Treasury market sell-off, says Bond Vigilante issue ‘a bit extreme’

Stocks rose on Monday, according to FactSet, with the Dow Jones Industrial Average DJIA up 0.5%, the S&P 500 Index SPX up 0.3% and the Nasdaq Composite Index COMP up 0.4%.

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