2022 proved to be a defining year for institutional cash investors. An era of low interest rates that lasted more than a decade was flipped on its head, as we entered a new era of interest-rate increases amidst a confluence of economic events. The Federal Reserve tightened policy at a nearly unprecedented speed, raising its target federal funds rate by a cumulative 425 basis points (bps) from March to December. As a result of the higher interest rates, cash investors had a banner year, especially in the context of broader market returns. (See Figure 1, below.)

However, lightning rarely strikes twice. Cash portfolio managers facing new uncertainties as we enter 2023 are confronting a quandary: Should they stay with very short but safe instruments, such as money-market funds or overnight deposits with yields that lag the federal funds rate? Or should they grab higher yields in longer-term securities and risk opportunity costs if future rates exceed current projections?