Risky assets are volatile, and cash has become a safe haven under the global market storm.
At present, the size of US money market mutual funds has reached $4.6 trillion, while the size of ultra-short term bond funds has reached about $150 billion, and the size is still growing.
Almost all asset classes, including stocks, bonds, credit and cryptocurrencies, were spared after the Fed storm, and fund managers looking for a safe haven finally found comfort in an obscure corner of the market: cash.
According to Emerging Portfolio Fund Research Global, money market inflows reached $30 billion in the week ended Sept. 21, and most of them earned more than 2%, some of them 3%, 4% or more.
Although risky asset prices are at multi-year lows, traders are in no hurry to place their money into these assets, in part because of suddenly sizeable gains in the money markets. Another reason is to use cash as its preferred asset against turmoil as the Fed continues to hike up interest rates to combat inflation, market players finally realised that the Fed is unlikely to abandon its hawkish position in the short term.
In fact, the returns of 2% - 4% of money market funds are not high, especially when the inflation rate is above 8%.
But in an environment where bonds are in a bearish market, global stock markets are at their lowest level since 2020, and further the Fed has made it clear that it is prepared to step on the brakes of the US economy to control soaring prices. As such these positive returns of a few percentage points are particularly valuable.
At present, most market participants believe that the rate of return on cash can reach 4%, and prefer to hold cash before the macro environment get a little clearer as it is not certain how long the Fed will remain hawkish, and people will not think about taking risks until the markets figure it out.
As a result, money funds, banks and other institutions are so flush with cash that they put record amounts of money into the Fed's overnight Reverse Repo Facility (RRP). After the Fed raised interest rates by 75 bps last week, the interest rate for this short-term facility is now 3.05%.
However, research shows that American commercial banks still have $18 trillion in deposits. In fact, US banks are sitting on about $6.4 trillion of excess liquidity (excess deposits relative to loans), up from about $250 billion in 2008.
Although most of the money comes from cheques and savings accounts, the yield is much lower than the money market funds, but it is a testament to both the scale of the government's stimulus measures during the epidemic and the degree of hesitation to invest in these funds.
The widening gap between the interest rates banks pay for deposits and those offered by money market funds has also attracted the attention of Fed policy makers. As a result, they point out, money market funds are likely to attract more capital inflows in the future, further boosting the use of RRP tools.
Dan LaRocco, money fund manager at Northern Trust Asset management, said: "the combination of excess cash, excess liquidity in the financial system and a great deal of uncertainty in the path of the federal funds rate makes cash attractive as an asset class. It also makes the Fed's reverse repo tool an attractive place to make excess liquidity work. "
On the other hand, all these moneys may also be biding its time that once the market sentiment improves or asset prices fall to levels that are hard to ignore, there will be plenty of money ready to trigger a wave of purchases.
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