For many investors, cash has traditionally served one primary purpose—liquidity—and money market funds have been a natural destination—offering daily access, limited interest rate sensitivity and the potential to earn income while waiting for the next investment opportunity.
Not all cash is the same, however, and every dollar doesn’t need to be available tomorrow. For investors with liquidity that can remain invested for 12 months or longer, extending modestly beyond traditional cash vehicles offers the potential opportunity to earn meaningfully more income—particularly on an after-tax basis.
By combining short-maturity investment-grade bonds with thoughtful tax management and portfolio customization, investors may be able to improve the productivity of their cash allocation without making a dramatic move out the risk spectrum. We call this approach Tax Optimized Cash.
Looking beyond the money market fund
The weighted average maturity of a typical money market fund is approximately 30 days. That very short maturity profile, so central to a money market fund’s liquidity characteristics, also limits an investor’s ability to capture the additional yield that may be available further out the yield curve.
An ultra-short portfolio can extend maturities beyond a money market fund while maintaining a relatively conservative risk profile. Our Tax Optimized Cash strategy, for example, can be customized across a maturity range from 1 month to 36 months, with average duration generally ranging from approximately 0.5 to 1.5 years.
That additional maturity introduces more interest rate risk than a money market fund, and the inclusion of corporate and municipal bonds introduces credit and liquidity considerations. Yet investors may also be compensated for accepting those risks through the yield curve and credit risk premium. Today’s yield environment helps illustrate the potential opportunity for added yield pickup.
The average of the highest points—from 3-month, 6-month, 1-year, 2-year and 3-year tenors—of the three yield curves shown below is 4.55%. We think a strategy that allocates investments between municipals and corporate bonds, according to the investor’s federal income tax rate, may be well-suited to take advantage of this.
Steep yield curve has offered additional income (percent)
Source: Bloomberg as of 8/31/2026. For illustrative purposes only. US Corporate Curve is the Bloomberg A-rated corporate yield curve, part of Bloomberg's Evaluated Pricing (BVAL) sector curves; Muni GO Curve (TEY) is the Bloomberg AA-rated Municipal General Obligation (GO) Index yield curve, grossed up using a 40.8% tax rate; TEY = taxable-equivalent yield. It is not possible to invest directly in an index. Indexes are unmanaged and do not reflect the deduction of fees or expenses. All investments are subject to risk, including the risk of loss.
A comparison of benchmark yields also helps to demonstrate the potential opportunity. If we compare the Crane 100 Money Fund Index to the Bloomberg 1-2 Year Municipal Index and the Bloomberg 0-3 Year US Corporate Index, we see taxable-equivalent yield pickups of 1.18 percentage points and 1.20 percentage points, respectively. On an after-tax basis, using the 40.8% top federal income tax rate on ordinary income, those pickups are 0.70 and 0.71 percentage points, respectively.
Comparing taxable-equivalent yields (percent)
Source: Crane Data MFI Daily Data, Bloomberg, Parametric as of 8/31/2026. Yields are from the Bloomberg 0-3 Year US Corporate Index and Bloomberg 1-2 Year Municipal Index, grossed up by 40.8% federal income tax rate. It is not possible to invest directly in an index. Indexes are unmanaged and do not reflect the deduction of fees or expenses. All investments are subject to risk, including the risk of loss.
The additional yield isn’t free: An ultra-short portfolio carries some measure of duration risk compared with roughly 30 days of weighted average maturity in a money market fund. But for capital that doesn’t require daily liquidity, taking a measured amount of duration and credit exposure may materially improve after-tax income potential.
Actively manage fixed income securities to turn inefficiency into opportunity
Cash management begins with the investor
No two investors have identical cash needs: Liquidity requirements, time horizons and risk tolerances differ. And for taxable investors, federal, state and sometimes local tax rates can materially affect which security would provide the most attractive after-tax return.
That’s why Parametric believes cash management should begin with the investor, rather than a predefined product. Our investment process evaluates the relative value of taxable and tax-exempt securities based on each client’s tax profile, while also incorporating maturity, credit quality, liquidity needs and portfolio restrictions.
The objective is straightforward: seek to maximize after-tax income and total return within a customized risk framework. The strategy can dynamically allocate among municipals, investment-grade corporate bonds, Treasurys, commercial paper and variable-rate instruments, depending on where the most compelling after-tax opportunities may be found.
One investor, multiple definitions of cash
Consider an investor who experiences a significant liquidity event, such as the sale of a business or a post-IPO realization of wealth.
Some of that capital may be needed within months for federal and state tax payments.
Some may be earmarked for gradual deployment into equities.
Some may not be needed for several years.
Rather than treating the entire balance as a single pool of cash, the portfolio could be customized around each of those time horizons.
Near-term maturities can be aligned with known tax liabilities through target-date or cashflow-matching techniques.
Laddered monthly or quarterly maturities can support planned equity market purchases, allowing the portfolio itself to generate liquidity as capital is deployed through a dollar-cost-averaging program.
Longer-dated holdings can extend further out the curve to capture additional yield from municipal and investment-grade corporate bonds, while security selection will reflect the investor’s federal and state tax rates and credit preferences.
The result is one portfolio with a coordinated liquidity schedule rather than a one-size-fits-all cash allocation. Different portions of the portfolio can serve different purposes, while the entire account is managed within a single customized framework focused on tax efficiency, liquidity, risk and return.
Why Parametric?
Parametric’s broader fixed income platform is built around separately managed accounts, proprietary technology, institutional trading capabilities, credit research and tax-efficient portfolio management. Those resources allow portfolios to be customized while still being managed systematically and at scale. The same combination of technology, research and trading scale underpins our broader SMA approach, where efficient execution and thoughtful portfolio construction are important components of investor outcomes.
The bottom line
For investors holding meaningful cash balances today, the key question may no longer be, “Where can I get the best cash yield?” A better question may be, “How much of my cash truly needs daily liquidity, and how can the rest work harder after taxes?”
Within the portion that can be invested over a longer horizon, the short end of the yield curve may potentially offer an attractive opportunity to capture additional income. Pairing that opportunity with a manager experienced in tax management and customization may transform cash from a one-size-fits-all allocation into a series of purpose-built portfolios designed around an investor’s actual needs.
Parametric and Morgan Stanley do not provide legal, tax, or accounting advice or services. Clients should consult with their own tax or legal advisor prior to entering into any transaction or strategy described herein.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.
Risk considerations
As interest rates rise, the value of a client portfolio invested primarily in fixed income securities or similar instruments is likely to decline. Conversely, when interest rates decline, the value of such a client portfolio is likely to rise. Securities with longer maturities are more sensitive to changes in interest rates than securities with shorter maturities, making them more volatile. A rising interest rate environment may extend the average life of mortgages or other asset-backed receivables underlying mortgage-backed or asset-backed securities. This extension increases the risk of depreciation due to future increases in market interest rates. In a declining interest rate environment, prepayment of certain types of securities may increase. In such circumstances, the portfolio manager may have to reinvest the prepayment proceeds at lower yields. A strategy that is managed toward an income objective may hold securities with longer maturities and therefore be more exposed to interest rate risk than a strategy focused on total return.
Investment strategies that seek to enhance after-tax performance may be unable to fully realize strategic gains or harvest losses due to various factors. Market conditions may limit the ability to generate tax losses. Tax-loss harvesting involves the risks that the new investment could perform worse than the original investment and that transaction costs could offset the tax benefit. Also, a tax-managed strategy may cause a client portfolio to hold a security in order to achieve more favorable tax treatment or to sell a security in order to create tax losses. Prospective investors should consult with a tax or legal advisor before making any investment decision.
09.30.2027 | RO 5897865
