Is Your Cash Account Costing You?
Cash instrument yields have fallen after recent Federal Reserve rate cuts. Ultra‑short municipal bonds can help investors preserve or enhance yield while providing conservative, tax-exempt income.
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3/2/2026
10 min read
Topic
ETFs
Key takeaways
- Cash yield volatility: Cash instruments, like money markets and Treasury bills, may offer competitive yields during high-rate environments, but these yields can quickly reset lower as the Federal Reserve eases and short-term policy rates decline.
- Hidden risks of cash: While perceived as "safe," cash instruments carry income risk, including reinvestment pressure, lower inflation-adjusted returns, and opportunity costs compared to short-term bonds.
- Repositioning for tax-exempt income: Investors can mitigate cash instrument interest rate risks by reallocating to ultra-short duration strategies, such as tax-exempt municipal bonds, which help preserve income with limited interest-rate sensitivity and incremental credit risk.
Executive Summary
A move lower in interest rates
Cash instruments like money markets and Treasury bills, while perceived as “safe”, can carry income risks such as reinvestment pressure, inflation erosion, and opportunity costs. As the Federal Reserve (Fed) eased rates, cash yields reset lower, exposing investors to rapid income deterioration.
A compelling alternative to cash instruments
Ultra-short municipal bonds can offer a strategic alternative, providing tax-exempt income, limited interest rate sensitivity, and higher tax-adjusted yield potential. By extending maturities slightly, investors can potentially lock in yields, reduce yield volatility, and maintain relative income stability even as rates decline. These bonds may be able to help investors access the “sweet spot” of low duration risk and strong, tax-exempt income potential.
Why active management for municipal bonds?
Active management in the municipal bond market may be able to add meaningful value through credit analysis, sector rotation, and duration management. Tax advantages can further improve their appeal, especially for high-tax-bracket investors. An active ultra‑short municipal bond strategy can offer a resilient alternative for investors seeking options beyond traditional cash accounts.
This material is provided for informational purposes only and is intended for retail distribution in the United States.
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Molly Landes is head of ETF Capital Markets for Allspring, leading strategic relationships with key trading partners and overseeing the quality and efficiency of our ETF trading business.