Money market fund holders have a new reason to turn to short-term bonds. The best way to play the Federal Reserve’s pivot towards monetary easing is to load up on shorter-term debt that still offers a yield of over 4%.

That’s the prevailing sentiment in the Treasury market as the Fed, with declining inflation, prepares to lower interest rates and support a soft landing for the U.S. economy. A portion of the nearly $6 trillion invested in money market mutual funds is expected to shift towards Treasury bonds, with investors fearing that cash-equivalent rates will soon dive.

Add to that the firm belief that the economy can avoid the recession that was once considered nearly inevitable, and one can understand investors’ lack of appetite for long-term securities. The consensus on Wall Street is clear: two-year Treasury notes represent the sweet spot on the yield curve, offering an attractive yield of around 4.4%, higher than any other maturity.

Long-term debt is expected to underperform as investors need more compensation for the additional risk. Among their concerns are the ongoing wave of issuances to finance the still-high U.S. public deficit and the extreme dangers that inflation may reignite next year.

Examining the yield curve makes it easy to see why two-year bonds are so attractive. This cycle inverted for the first time more than a year and a half ago, resulting in long-term rates lower than those of shorter-dated bonds. Even though some investors are betting that the situation will return to a more typical pattern next year, the yield on 10-year bonds remains about 50 basis points lower than that of two-year bonds. As recently as July, the spread was over 100 basis points.

The scenario remains uncertain. A recession, while not the base case, is still possible, particularly given the current geopolitical context. On the other hand, the Fed could prove to be more cautious. New York Fed President John Williams has stated that discussions about a potential rate cut by March were premature. However, swaps indicate an approximately 80% chance of the Fed lowering rates by March. In total, the market anticipates 124 basis points of easing by the end of 2024, compared to the Fed’s projected 75 basis points.