Zhitong Finance and Economics has noticed that investors are pouring billions of dollars into the money market every day. The company's treasurers are hoarding record levels of cash. The market is smoothly digesting a large amount of US Treasuries.
For an asset class that was considered dead by many market leaders at the beginning of the year, cash still has a lot of life.
According to the Investment Company Association, investors have added $128 billion to the U.S. money market** since the beginning of the year. At the end of the third quarter, U.S. businesses held a record 4With $4 trillion in cash, and more than $1 trillion in U.S. Treasuries issued since mid-2019, there is room for more in the market.
This is in stark contrast to the situation a few months ago, when one of the hottest questions on Wall Street was that once the Fed started cutting interest rates and reducing the attractiveness of its money reserves, investors would reallocate all their cash reserves to**.
But a lot has changed since then. First, traders sharply lowered their expectations for policy easing. The later the Fed starts lowering its benchmark interest rate, the more likely it is that cash holdings in the money market** will yield % or even higher, so that investors don't look further afield.
Add to that the fact that corporate executives don't seem to be in a hurry to spend money after the pandemic and depositors remain concerned about the state of the banking system, and all signs point to another big year for cash.
Peter Crane, president of Crane Data LLC, which tracks the money market** industry, said a cash-rich year wasn't a flash in the pan. "The overall renewed sensitivity to interest rates is still contagious, and a lot of money hasn't even moved or looked at interest rates yet. ”
In the 10 years following the financial crisis, cash has been a long-neglected option as the Fed keeps borrowing costs close to zero. But things have changed after a measured three-year cycle of rate hikes, and the pandemic has sparked a scramble for safe havens.
In 2022, the Federal Reserve launched the most aggressive pace of interest rate hikes in decades, pushing rates well above 5%, with everyone from asset managers to home investors taking note of the attractiveness of money markets**, U.S. Treasuries, and other short-term assets, while bank deposits yielded almost zero gains.
As a result, more than $1 trillion flowed into the currency last year**, the most ever recorded by ICI since 2007. These inflows have helped the currency** keep pace with U.S. Treasury issuance, and while the gap between total money market assets and outstanding Treasuries is narrowing, it still indicates that the market is interested in short-term Treasuries.
The rate hike has pushed short-term Treasury yields soaring above longer-dated Treasury yields, which are currently around 537%, more than a percentage point higher than the benchmark 10-year Treasury yield. Although the so-called curve inversion heralds a potential recession, it is unlikely that cash earned more in short-term bonds and currencies that pay similar interest rates** will flow out so quickly.
Now, with policymakers signaling a shift to rate cuts, debate is brewing about how much and how long this reserve will last. The timing of the rate cut will come into play, and traders have lowered their expectations for rate hikes ahead of the middle of the year following the release of strong employment and inflation data this month.
Late last year, Jeffrey Rosenberg of BlackRock Financial Management said he expected a significant portion of $6 trillion in monetary** assets to shift to areas such as credit, credit, and even Treasuries. Companies such as Citigroup Global Wealth and UBS Asset Management share a similar view.
In the view of JPMorgan Chase & Co., led by Teresa Ho, only about $500 billion is at risk of capital flight, as most of that money is used for cash management or liquidity purposes.
Also, taking into account the comparison of ** with cash,"Cash is more attractive relative to expected earnings"Joseph Abate, a strategist at Barclays Group, wrote in his monthly note last week that he compared the S&P 500's expected earnings per share over the next 12 months to the federal ** rate, a proxy for cash returns.
On the other hand, according to Deborah Cunningham, chief investment officer of Federated Hermes Global Liquidity Markets, by 2024, about $1 trillion will flow into the market from companies that have not yet made large-scale cash transfers.
This is confirmed by ICI's data. The data shows that since March 2022, 1Of the $198 trillion, investors account for about 80%, with institutional investors covering the rest.
Cunningham said"The market expects that if the Fed is in a peak or plateau, institutional funds will start to recover"This is because companies outsource cash management to reap the benefits.
Some companies have increased their holdings of currencies**. Facebook's parent company, Meta Platforms, increased its allocation to currencies to $32.9 billion at the end of last year from $29.6 billion at the end of September, according to a filing with the U.S. Securities and Exchange Commission (SEC). At the end of 2023, Amazon had $39.2 billion in currency**, compared to $20.4 billion in the previous quarter.
Qualcomm increased its holdings in the money market** in 2023, with cash and cash equivalents up to Dec. 24 from 48 a year earlier$800 million to $81$300 million.
For us, the cash balance is actually a form of strategic flexibility," said Akash Palkhiwala, chief financial and operating officer, in an interview. "We want to stay liquid, we want to stay on the lower risk end. So, if you look at our cash balances, you'll see that a lot of them are invested in the money market**.
Tony Carfang, managing director of Carfang Group, said that as of the third quarter of last year, corporate cash reserves as a percentage of GDP had risen to 16% from 12% in March 2020 due to the liquidity shock caused by the pandemic. That means another $1 trillion in cash hoarded by companies, he said. He noted that in the third quarter the figure reached 4$4 trillion.
Cash is definitely the foundation of a business's balance sheet, and it's not dead yet"Carfang said. But corporate treasurers may think it's too conservative to hold so much cash as the pandemic recedes from collective memory. A more favourable regulatory environment for transactions could also spur businesses to spend the money, he said.
Jerome Schneider, Head of Short-Term Portfolio Management and Financing at Pacific Investment Management, encourages investors seeking to preserve their value to start increasing their interest rate exposures, especially from one year to two years.
Once the Fed has already started cutting interest rates, it may be a little late for investors to continue investing in a high-yield environment"Schneider said.
Crane said cash was unchanged despite the imminent funding cuts. Given concerns about the banking system and the large number of uninsured deposits, he expects money** holdings to reach $7 trillion this year.
"If money market holdings** fall from current levels in 2024, I'm going to eat my hat," he said. ”