Cash piles hit record highs, but fixed income offers higher yields: BlackRock

[SINGAPORE] Cash has reached historic highs globally as money market balances hit almost US$12 trillion by end-2025, but BlackRock warns that there is an opportunity cost to keeping too much liquidity.

The one-year average returns for money market funds sit at 2.8 per cent, much lower than US Treasury bills which sit at 6 per cent, based on a report by BlackRock in May. This is lower than the current US inflation rate of 3.3 per cent as at March 2026.

Holding excess cash or cash equivalents is no longer optimal when returns are between 2 and 3 per cent, as inflation completely erodes the returns, said Koay Hui Sien, head of iShares fixed-income product strategy, Apac ex-Japan at BlackRock.

“Contrast it to bonds in general bonds, you could potentially not take too much risk and still get 6 to 8 per cent, so that’s the opportunity cost we’re talking about,” she added.

Fixed-income exchange traded funds (ETFs) is another option for investors to still earn a yield rather than opt for a full flight to safety by holding cash, said Koay.

There is also an element of capital preservation with fixed-income ETFs, which can aid in portfolio construction for investors, said Koay. With the vibrancy in the capital markets and increased investor interest in private markets, real estate and digital assets, fixed-income ETFs can deliver a stable yield, higher than that of cash.

“The ability to deliver steady returns, yield above cash, and then the ability to deliver income for those really wanting income, bond ETFs can do that,” Koay added.

Fixed-income ETFs can take on three roles for investors, as a stabilising force, liquidity engine and an income anchor, noted Koay. Fixed income can stabilise against the riskier assets in a portfolio, including digital asset allocations, she added.

The second role as a liquidity engine comes as assets like real estate and private credit offer a premium but the capital is illiquid. As one side of a portfolio becomes more illiquid, the more liquid the other parts of the portfolio need to be, said Koay, pointing out that fixed-income ETFs’ average trading volume have tripled from US$20 billion a day to US$67 billion a day.

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“It’s built on a bond market that has become more accessible, digitised, (and) more modern. This job of a liquidity engine can be met by fixed-income ETFs,” she added.

Fixed-income ETFs also fulfil the role as an income anchor, with ETFs being able to offer higher yields than that of government bonds whose yields might not even beat inflation, noted Koay. The breadth of offerings has expanded from domestic to foreign high-quality credit to high-yield credit, offering more options for investors.

She noted that portfolios yielding roughly 6 per cent can be built with fewer than 20 ETFs, which offer exposure to tens of thousands of underlying bonds.

“As long as this part is steadily generating income, other parts of the portfolio can go and reach for higher octane bets, that’s the beauty of diversification of fixed-income ETFs,” Koay added.

Still there are challenges in addressing the correlation between fixed-income and equity markets, with bonds and equities facing a sell-off together in 2022, despite the traditional view that they are negatively correlated, she noted.

But fixed-income ETFs still saw inflows.

“The fixed-income market, despite the equity correlation, prevailed,” said Koay.