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PaperclipPerfector  1mo ago (text post)   2911 thread views

Small-Scale Question Sunday for November 16, 2025

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An r/bogleheads bigwig says otherwise.

The Cash Trap

The way it might play out if you switch from a total bond fund to a cash equivalent is as follows. The economy goes into a recession, and the Fed signals and then implements significant rate cuts—for example, −1.5% over 2 years. Now you’ll find your HYSA or MMF may be suddenly yielding less than 3% while the total bond fund, thanks to its 5–6 year duration, is still yielding close to 5%. So you think you’ll switch back to the total bond fund after that happens. But what you missed is that, when the Fed cut rates, BND’s holdings became more valuable and the price will have shot up. How much? I can’t say exactly. But, as one indication, at the end of October 2023, the Fed only signaled that they were stopping rate increases—not even a signal of actual cuts—and BND’s value jumped 8% in two months.

Think about it—you are contemplating moving money from BND to an MMF to earn maybe 0.75% more yield over the course of a whole year, and when the Fed signals rate pausing BND increases in value by 8% in just 2 months. The December 12–13 Fed meeting alone caused a +1.6% daily increase in BND’s value. So the decision to chase a little more yield could cost you years’ worth of the spread you were trying to capture. As described in this post:

The cash trap describes the risk of investing in short-term bonds or cash instruments at higher rates that ultimately prove temporary. The Federal Reserve eventually cuts rates, and the high short-term yields disappear. Because the securities have short maturities, falling rates do not lead to material price appreciation. Once the securities mature, the cash flow stream withers and investors are left with a much lower return outlook. However, if investors lock in longer-term rates, unlike the short-term options, the yields do not go away. Not only does the cash flow stream stay steady, but the reduction in market rates also leads to price appreciation. The result historically has been significantly higher returns on longer-term securities, despite the lower starting yield.

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