Despite all the chatter about cash on the sidelines moving into the market, JPMorgan believes that money, for the most part, is staying put. Cash has flowed into money market funds as interest rates rose. While off its peak, the Crane 100 Index of the 100 largest taxable money funds currently has a seven-day yield of 5.17%. Meanwhile, $41.7 billion moved into money market funds in just the week ended Wednesday, bringing their total assets to a record high of $6 trillion, according to the Investment Company Institute . The inflows this year come at a time when, historically, money funds see seasonal outflows. That is “challenging the view that the $6 trillion of cash sitting in MMFs will rotate into alternative assets such as fixed income and/or equities,” JPMorgan analyst Teresa Ho wrote in a note last week. Nor does Ho expect that income investors will move the money to longer-duration bonds once the Federal Reserve starts cutting rates later this year. Ho calculates about $5.5 trillion of the assets sitting in money market funds are core liquidity for companies and cash savings for retail investors. “The money is not there to chase yield or returns. It is truly money that is being managed by corporations for everyday purchases. Regardless of what other markets are doing, that money is here to stay,” Ho said in an interview with CNBC. In fact, the most recent push into money market funds is coming from institutional investors, according to the ICI. Assets of institutional money market funds increased by $33.06 billion to $3.65 trillion, while retail money market funds rose by $8.62 billion to $2.35 trillion, the organization found. “Historically, institutional investors have put money into money market funds when the Fed reaches a peak in a tightening cycle, as Chairman Powell indicated [Wednesday],” Shelly Antoniewicz, ICI deputy chief economist, said in a statement. That’s because yields on money market funds lag behind Fed moves. Therefore, the yields will stay higher for a little bit longer after a rate cut as Treasury bills and commercial paper yields start to move down. The central bank held rates steady after its meeting Wednesday and indicated it isn’t ready to start lowering rates yet. Fed Chair Jerome Powell said it is unlikely cuts will happen at the next meeting of the central bank in March. When will investors deploy some cash? By Ho’s calculations, there is about $500 billion sitting in money market funds that is susceptible to “flight risk,” particularly from retail investors. Yet she isn’t banking on that money moving out soon, either. “We don’t really see the rates curve dis-inverting to the point where it is actually a positive slope until the end of this year, if the Fed cuts in the summer,” she said, referring to the fact short-term yields today are higher than long-term yields “That tells me investors are not going to necessarily move out the curve, seeing it is a lower yield right now, and they won’t see a higher yield until much later in the year.” Plus, money funds haven’t seen interest rates above 5% since 2007. ” Psychologically, there is that 5% level that people love,” she said. AllianceBernstein, however, advocates making the move now. Historically, cash “flooded” out of money markets and into longer-term debt as the Fed eased, senior investment strategist Monika Carlson wrote last week , before the Fed’s latest meeting. She anticipates that the potential surge in demand for bonds is exceptionally high thanks to the trillions sitting in cash. “To avoid missing out on the potential returns that represents, we think investors should aim to get ahead of the shift from cash to bonds,” Carlson said. “Historically, in the three months prior to the first Fed rate cut, the yield on the 10-year US Treasury fell an average of 90 basis points. That’s why past investors captured the biggest returns when they invested several months prior to the start of the easing cycle.” Bond yields move inversely to prices. Amy Arnott, portfolio strategist at Morningstar, believes investors will start to pull some of their cash out of money markets and other short-term assets when they see short-term yields dipping below the rate of inflation. Until then, “If you are able to get a decent yield above inflation with essentially no risk, that basically explains why we have seen such a flood of assets into money market funds,” she said. Check your investment goals However, Arnott warned it is dangerous to try to predict the right time to move out of cash and into the market. “Rather than trying to play that game, where people can often get burned, it is better to look at your investment goals and your time horizon,” she said. If you are saving for a purchase you plan to make in a couple of years, like a house or new car, money market funds are a good place to earn extra income on your cash, she said. If you are trying to build long-term wealth for retirement that is 10 years away or more, you are more likely going to be better off in stocks, she advised. Fixed income is also an important part of a balanced portfolio, said Rob Williams, managing director of financial planning, retirement income and wealth management at the Charles Schwab Center for Financial Research. “If you are overweight to cash, having a plan to move back into the bond market for some of those income generation investments is something we are recommending for most investors,” he said. He suggests extending duration slightly and sticking with high quality assets in Treasurys, municipal bonds or highly rated corporate bonds.
Investors are unlikely to dump cash and lock in yields in bonds, JPMorgan says
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