Payden & Rygel: What’s Ahead for Fixed Income in 2025?

Payden & Rygel: What’s Ahead for Fixed Income in 2025?

2 januari 2025

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Kerry Rapanot (photo archive Payden & Rygel).jpg

By Kerry Rapanot CFA, Director, Payden & Rygel

Assets in money market funds reached an all-time high of $7 trillion this past month. Now that rates are moving lower, money market yields may not be as attractive to many investors and assets may gradually leave money funds.

While we've reached these new highs, prime institutional funds are the only category with net outflows this year, down by over half of the assets under management and expected to continue to shrink. This is directly a result of the SEC's latest round of reforms.

The low duration opportunity.
For investors seeking an alternative to money market funds, a low duration strategy can make sense. Low duration funds are different from money market funds in two ways:

1) Longer maturities:
Low duration strategies invest in bonds with maturities as long as five years, compared to the 397-day maturity limit on money market funds. This gives investors the flexibility to lock in longer term yields when short-term rates are declining.

2) Investment flexibility:
Low duration strategies can invest across the fixed income universe – from Treasury bills to corporates to structured bond credit. This investment diversification can generate greater returns while maintaining liquidity.

Two low duration strategies.
Investors can tailor the risk and return characteristics of their cash holdings to their needs by investing in either or both of two types of funds:

1) Enhanced cash:
These funds are only slightly riskier than money market funds. They have short durations, generally less than 0.75 of a year, and low spread durations, typically under 1.25 years. Volatility is low and liquidity is exceptional.

2) Low duration:
These funds typically have a one- to three-year benchmark duration and spread duration of somewhere between one and three years. They are a bit more volatile than enhanced cash strategies but less risky than long, intermediate or core bond strategies.

 

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