This comes as the Fed’s latest “dot plot” shows a sharply divided FOMC, adding further uncertainty to the interest-rate outlook. The CME FedWatch Tool currently suggests that financial markets are pricing in a 43% chance the Fed will cut its benchmark overnight borrowing rate by 25 basis points at its December meeting.
Kevin Calabro, senior product specialist for Franklin Templeton Fixed Income, said that while many investors expect deep rate cuts following the easing moves in September and October, the firm believes these expectations exceed both the Fed’s guidance and what current economic conditions justify.
“Absent a sudden, sharp deterioration in the US labor market, we think the Fed will choose to stay on hold at the December FOMC meeting and then possibly cut once more in the first quarter of 2026.”
He added that, “Against this uncertain background, one thing we can say with high confidence is that we believe the Fed is unlikely to hike rates at this stage. Therefore, keeping money parked in cash-like investments such as money market funds and short-term Treasuries may seem less attractive, and we think it may be time for some investors to consider putting that money to work in fixed income markets.”
According to Franklin Templeton, past market cycles suggest that – despite volatility.- cash rarely delivers the strongest outcomes for multi-asset investors.
“We expect cash to underperform other asset classes going forward, and as such it may make sense for investors to look to fixed income for risk mitigation, portfolio diversification and income generation,” Calabro said.
The firm analysed historical fixed income excess returns versus cash across the previous seven Fed rate-cutting cycles, using Morningstar data and focusing on four key bond categories that reflect different risk and duration profiles: ultrashort bond, short-term bond, core bond and core plus bond.
Looking at the historical results, Calabro sees a clear pattern. “Looking at these historical bond returns versus cash, there is a clear trend: bonds tend to outperform cash in a Fed rate-cutting cycle when there is not a broader macroeconomic scenario at play, such as a recession or valuation bubble bursting.
“The only two rate-cutting cycles in which all bond categories underperformed cash were in 1998 (Long-Term Capital Management crisis) and 2007–2008 (global financial crisis),” he said.
“Looking at performance during the current rate-cutting cycle (September 18, 2024 – November 7, 2025), the ultrashort bond and short duration bond categories have outperformed cash, while the intermediate core and core plus categories have lagged. This can be attributed to the fact that short-term interest rates remain relatively high; however, continued cuts to interest rates could lead core and core plus bond funds to outperform due to the higher-yielding, longer-duration nature of assets in those categories.”
Franklin Templeton said with their expectations for a prolonged, shallow rate-cutting cycle, the firm believe that these bond categories are four solid options that can fit various client liquidity and risk profiles.
“We believe that short-duration debt offers the ability to generate attractive returns while maintaining a lower risk posture, while core and core plus bond funds present investors with the ability to lock in durable yields further out the curve,” Calabro said.
