Sit on a $5 Trillion Cash Pile
A market with nowhere to hide keeps asset managers on the defensive.
From stocks to bonds to credit to cryptocurrencies, money managers looking for a place to hide from the storm caused by the Federal Reserve and hitting almost every asset class are finding comfort in an area of the market that has been looked down upon for a long time: cash.
Investors have put away $4.6 trillion in US money market mutual funds, and there is about $150 billion in ultra-short bond funds. And it's getting bigger. EPFR Global says that $30 billion came into cash during the week ending September 21. Once, that stash gave almost nothing back. Most of it gives back more than 2%, and some pockets pay 3%, 4%, or even more.
Even though prices are at their lowest point in years, traders haven't been in a hurry to put their money into riskier assets because of the good payout. The other reason is that, as the Fed continues to raise interest rates to slow inflation, market participants are finally realising that the central bank isn't likely to change its hawkish policy any time soon. This means that cash is the best asset to hold onto during the turmoil.
Barbara Ann Bernard, who started the hedge fund Wincrest Capital, said, "I don't think it's time to be a hero." "I have as much money as I do because I just want to stay alive until the end of the year." "This situation is going to be hard for a while."
At first glance, two to four percent may not seem like much, especially when inflation is above eight percent.
But in a world where bonds are in a bear market, US stocks are down more than 22% this year, and the Fed has made it clear it's willing to slam the brakes on the economy to get rising prices under control, those few percentage points of positive return are becoming more appealing.
This is especially true when you consider that taxable money funds tracked by Crane Data had an average seven-day yield of only 0.02% a year ago.
Anwiti Bahuguna, head of multi-asset strategy at Columbia Threadneedle Investments, said, "Most market participants see for now that, hey, cash yields 4%, so why not just sit in cash until the macro environment gets a little clearer?" "We don't know how long the Fed will keep doing this. People don't want to stick their necks out until they know what's going on. "
Bahuguna said that after the recent drop in stock prices and bond prices, she is slowly buying more stocks and bonds. This is part of a long-term plan because she thinks inflation will slowly start to go down.
Money-market funds, banks, and other financial institutions are so flush with cash right now that they are putting record amounts into the Fed's overnight reverse repurchase agreement facility. This is a short-term instrument that now pays 3.05% after the Fed raised rates by 75 basis points last week.
Fed data shows that there is another $18 trillion in deposits at US commercial banks, which is a lot of money. In fact, the difference between deposits and loans at US banks is about $6.4 trillion, which is called "excess liquidity."This is up from about $250 billion in 2008.
Even though most of it is in checking and savings accounts, which don't earn as much as money market funds, it shows how much stimulus was given out during the pandemic and how reluctant people have become to invest it.
Fed policymakers have noticed that the difference between what banks pay on deposits and what money-market funds offer is getting bigger. As a result, money-market funds are likely to get more money in the future, which will encourage more people to use the RRP facility.
At the same time, too much cash, too much liquidity in the financial system, and a lot of uncertainty about the path of the fed funds rate made cash an appealing asset class, said Dan LaRocco, a money-fund manager at Northern Trust Asset Management, which manages $1 trillion in assets. "The Fed's reverse repo facility is a good place to use up that extra cash."
On the other hand, all this waiting money means that there is a lot of "dry powder" ready to buy if market sentiment improves or asset prices drop to levels that are too good to pass up.
Bill Eigen, who runs the Strategic Income Opportunities Fund at JPMorgan Asset Management, is looking for the second one.
He has cut the risk in his portfolio this year and increased the amount of cash in it from 65% in early June to as much as 74% at the end of August. In the past few months, he sold all of his non-agency mortgage-backed securities and said that 14% of his portfolio is made up of very short-term investment-grade floating-rate securities.
Eigen, who is based in Boston and is in charge of $9.3 billion for the fund and $11.2 billion in total, has put up to 75% of assets in high-yield bonds at times. But he is waiting for spreads to get even wider before he uses his cash again.
Eigen: "The turning point will be when people realise that inflation isn't going away and that their hopes for a "dovish" Fed aren't coming true." "When people start to price credit in line with where the Fed is going, which is hawkish and not stopping soon, and when people realise inflation is here to stay, that will be the "give-up" phase and when my liquidity comes in handy."