A simple way to benefit from rising interest rates

By the Editorial Team · Saturday, October 24, 2026

Money market funds have benefited from the Federal Reserve’s recent interest rate increases, with average yields rising to about 3.71% in early October and potentially nearing 4% by year-end. This makes them an appealing low-risk option for investors seeking stable income in a rising rate environment, despite offering lower returns than stocks and lacking federal insurance.

Rising interest rates have posed challenges across various financial markets in 2023 but have provided a distinct advantage for money market funds, which have benefited from higher short-term yields with relatively little complexity.

Money market funds, which invest primarily in short-term government securities such as Treasury bills, closely track changes in the U.S. Federal Reserve’s benchmark interest rates. The Fed’s recent quarter-point increase on September 16 raised the federal funds rate to a range of 3.75% to 4%, prompting money market yields to rise as well, albeit more gradually due to the typical 36-day turnover of their holdings. As of early October, the average yield on the 100 largest money market funds stood at approximately 3.71%, up from 3.51% at the end of August. Market experts anticipate that these yields could approach 4% by year-end and potentially rise further as the Fed continues to signal additional rate hikes.

Futures markets suggest that inflation is expected to remain above the Fed’s 2% target for some time, with forecasts indicating the federal funds rate could reach 4.50% to 4.75% by mid-2027. If these expectations materialize, money market rates are likely to continue climbing, enhancing the appeal of these funds as a source of income during a period where many other asset classes face headwinds.

Despite their rising yields, money market funds carry certain limitations. Unlike bank deposits, they are not insured by the Federal Deposit Insurance Corporation. Investors seeking government-backed safety might prefer insured products such as certificates of deposit (CDs) or high-yield savings accounts, which have also experienced rate increases. However, regulatory changes implemented after the 2007-2009 financial crisis have made money market funds safer, with most retail funds now primarily invested in U.S. government securities rather than riskier commercial paper.

Fees for money market funds vary, and lower expenses can contribute to higher net returns. For example, certain funds managed by large providers like Vanguard charge annual fees ranging roughly from 0.07% to 0.12%. Investors are encouraged to consider fees when evaluating fund options.

While money market funds provide stable, modest returns, they do not offer the growth potential of stocks. In 2023, leading equities such as Nvidia have returned over 12%, and the S&P 500 index has risen approximately 14%. In contrast, top money market funds have yielded around 3%, which, while significantly higher than near-zero checking account rates, only generate modest income. However, compared to investment-grade bond funds—which faced losses this year due to their sensitivity to rising rates—the short duration and quick turnover of money market fund holdings mitigate price declines, making them relatively resilient in this environment.

Historically, money market returns have trailed those of stocks and longer-term bonds over extended periods. From 1928 to 2025, annualized returns on three-month Treasury bills, often used as a proxy for money market funds, averaged about 3.4%, compared to 10% for the S&P 500 and 4.8% for 10-year Treasury notes. As such, money market funds are generally seen as suitable for cash management and liquidity rather than long-term growth.

In summary, while rising interest rates have challenged many parts of the financial system, money market funds stand out as a straightforward vehicle offering enhanced yields with low volatility. For investors seeking a conservative option to hold cash and generate modest income amid ongoing monetary tightening, these funds provide a practical and timely choice.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.