Bloomberg — From stocks to bonds, from credit to cryptocurrencies, money managers looking for a place to hedge against the US Federal Reserve’s storm that hits nearly all asset types are finding refuge in a very bad corner of the market: cash.
In US money market mutual funds, investors own $4.6 trillion, while ultrashort bond funds currently own about $150 billion. And the amount is increasing. The cash received $30 billion in the week ending September 21, according to data from EPFR Global. previously, This reserve has produced practically nothing, and now most of it is gaining more than 2%, with exchanges paying 3%, 4% or more.
Surprising respectable returns are one of the reasons why traders are not in a rush to pour capital into riskier assets, even with prices dropping to multi-year lows. The other is that as the Federal Reserve continues to raise interest rates to curb inflation, market participants are realizing that the central bank is unlikely to abandon its hawkish policy anytime soon, causing cash to be the preferred asset to weather the storm.
“I don’t think it’s time to be a champ,” said Barbara Ann Bernard, founder of hedge fund Wincrest Capital. “The reason I have a lot of money is because I just want to survive and end the year on the upside. This is going to be a tough environment for a while.”
A ratio between 2 and 4% may not seem like much at first glance, especially with inflation rising to more than 8%.
But in a world where bonds are in a bear market, global stocks are at their lowest level since 2020 and The Fed has made it clear that it is Ready to slow down the economy To control price increases, those few percentage points of positive returns are becoming more attractive.
This is especially true when you consider that just a year ago, the seven-day average return on taxable money market funds, according to tracking Crane Data, was just 0.02%.
“Most market participants are now seeing cash as 4%, so why not stay in cash while the macro environment improves a little bit?” said Anwitti Bahuguna, chief strategy officer at Columbia Threadneedle, a multi-asset investment firm. “What is unknown is how long the Fed will hold. Until we get that clarity, people don’t want to go off their necks.”
Bahujona said he is gradually adding stocks and bonds after the recent sale, as part of a long-term game given his view that inflation will slowly begin to moderate.
Money funds, banks and others are so full of cash that they are pumping record amounts into the Federal Reserve’s Reverse Repo Facility, a short-term instrument that, after raising the central bank by 75 basis points last week, is now paying a rate of 3.05%.
Looking further, there is another $18 trillion in deposits in US commercial banks, according to Federal Reserve data. In fact, US banks have $6.4 trillion in excess liquidity, or excess deposits compared to loans, up from $250 billion in 2008.
While it’s mostly in checking and savings accounts that earn far less than money market money, it’s a testament to both the massive amount of stimulus that has been handed out during the pandemic, and people’s reluctance to invest it.
The widening gap between what banks pay for deposits and what money market funds offer has caught the attention of federal policy makers, who note that funds are likely to attract more inflows. Beyond that.
“There are a combination of factors that have made excess cash, excess liquidity in the financial system, and a significant amount of uncertainty about the path of the federal funds rate, cash as an asset class.” said Dan Larocco, money manager at Northern Trust Asset Management, which oversees $1 trillion. “The Federal Reserve’s Reverse Repo Facility is an attractive place to run this excess liquidity.”
Of course, the flip side of the coin is that all of this money on hold means there is plenty of dry powder ready to launch a buying spree if market sentiment improves, or asset prices drop to lower levels.
Bill Eggen, who oversees JPMorgan Asset Management’s Strategic Income Opportunities Fund, is watching the latter.
It has reduced its portfolio risk this year and increased its cash position to 74% since the end of August, up from 65% in early June. In recent months, it has sold non-agency mortgage-backed securities, saying another 14% of the portfolio is in very short-term, investment-grade floating-rate securities.
Eigen, which is based in Boston and oversees the fund’s $9.3 billion and $11.2 billion in total, has sometimes set aside up to 75% of assets for high-yield bonds. But he expects the spreads to widen further before offering his cash holdings again.
“The catalyst will be when people begin to realize that inflation is not going away and that their dreams of a pessimistic Federal Reserve are not fulfilled,” Eggen said. “When people start pricing credit in line with the trend of this Fed, which is hawkish and not going to stop anytime soon, and when people realize that inflation is entrenched, that will be the stage of letting go. And when liquidity proves useful.”
Assisted by Eddie van der Walt.
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