Money market funds remain popular – but are they still a good deal?

Despite predictions of a mass exodus from money market funds, delayed rate cuts have kept investors parked in cash. Now, with the Bank of England shifting its focus from inflation to economic growth, a path to lower rates over the next year is becoming clearer. It could also change the game.

Is cash still relevant? 

Market volatility hasn’t gone away. From trade tension to fiscal uncertainty, investors still crave stability – and money market funds have delivered just that.  

But investors face an unavoidable question: how long will yields on money market funds remain attractive, given the predicted downward path for interest rates?

The good news? We’re unlikely to return to a near-zero interest rate environment anytime soon. Inflation remains sticky due to structural forces such as de-globalisation, rising government debt (including Europe’s defence spending spree) and tighter labour markets. That means central banks will likely cut rates slowly.

Aberdeen economists forecast UK interest rates will ease from 4% to 3.75% by year-end and to 3% by the close of 2026. For investors seeking low-risk income, those levels can still play a useful role in a balanced portfolio.

What are the alternatives to money market funds?

If you’re worried about falling yields on cash, short-dated credit could be a smart next step.

Cash is unbeatable for low volatility and minimal risk of drawdowns. But that safety comes at the cost of lower returns. Short-dated corporate bonds, by contrast, can offer a yield increase for only a slight increase in risk.

Historically, short-dated credit has been one of the most resilient corners of the bond market. Indeed, the Bank of America1-3 Year Global Corporate Index has recorded a negative return just once in the past 28 calendar years.

Over the same period, short-dated credit has outperformed cash in most market conditions (see below). The chart focuses on US credit, but the performance is mirrored in sterling and euro markets.

Put simply: for investors looking to enhance their portfolio's yield, short-dated credit has delivered higher returns over the last decade without straying far from the safety of cash. 

Won’t the yield on short-dated credit also fall as interest rate cuts materialise?

Not necessarily. While money market yields tend to drop quickly as rates fall, short-dated credit is a different story.

Markets have already priced in many of the expected rate cuts for late 2025 and into 2026. That means yields on short-dated bonds may not move much lower. Case in point: after the Bank of England’s 0.25% cut in August, 2-year gilt yields barely budged around the event.

Today, the 1-3-year sterling corporate bond index offers a yield of around 4.6%, about 0.6% higher than cash. In fact, that yield gap may widen as interest rate cuts force money market yields lower, an outcome where short dated credit can gave investors a stronger income edge.

And even if yields do fall slightly, investors in short-dated credit could benefit from rising bond prices – an outcome that money market funds can’t deliver.

Investors can also broaden their horizons globally, exploring opportunities in higher-yielding regions such as Asia and emerging markets. These markets are often less correlated with developed economies and can provide important diversification benefits. For example, Asian corporate bonds typically offer higher yields relative to developed markets due to strong regional growth dynamics.

Meanwhile, for ultra-cautious investors, bonds with less than one year to maturity can offer near-cash volatility with greater scope for upside, as seen in the scatter plot chart above.   

Final thoughts…

Interest rates might be falling, but they are likely to remain well above the ultra-low levels of the last decade. That means a cash allocation can remain an important part of a balanced portfolio, offering near-risk-free yield and welcome stability.

But for investors willing to take on a little more risk, short-dated credit is worth a look. With higher yields and a resilient track record, it’s a compelling way to limit yield erosion as rates decline. By adding global exposure, such as Asian and emerging market bonds, investors can diversify their portfolios and access higher-yielding opportunities that complement traditional sterling or euro credit allocations.

We believe this approach offers investors the smart way to step out of cash – adding yield without losing sleep.