Some financial firms are urging investors seeking higher returns to convert cash into short-term bond funds, Reuters reports.

Stung by losses in the stock market, Americans are getting warier with their investment dollars, so much so that assets in money market funds and bank savings accounts have topped $5 trillion.

Some assert that due to the 0.75 percent rate of return on the average money-market fund versus than the 3% inflation rate, consumers are greatly overpaying for financial peace of mind.

Opponents of this short-term bond strategy warn that in a search to increase yields, investors could be taking on increasing risk, and talk about a potential bond bubble has been growing.

According to Peter Crane, managing editor of iMoneyNet ’s Money Fund Report, "Money market funds have not been touched by any of blowups in telecom or accounting scandals, whereas a number of short-term bond funds have held those securities and have paid dearly for it."
Paul McCulley, a portfolio manager at PIMCO , said in a report on the company's web site that investors are "irrationally" parking too much money in cash in their search for perfect liquidity. For just a little more risk, investors could improve returns by shifting cash from money market mutual funds and into short-term bond funds, McCulley said.

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