$7,000,000,000,000 in Cash Sidelined As Investors Refuse To Pour Capital Into Risk Assets: Report
A total of $7 trillion is now fully sidelined as a group of investors refuse to pour their cash into risk assets, according to a new report.
New figures show the amount of capital sitting on the sidelines in money market funds is at a fresh record high, reports Reuters.
Money market funds allow people to invest in lower-risk and short-term debt securities including US Treasuries.
Investors began flocking to money market funds in 2022 when the Federal Reserve initiated a series of aggressive interest rate hikes. This strategic move by the Fed was aimed at curbing inflation and stabilizing the economy, but it also had the effect of significantly boosting yields on these funds. As a result, investors, seeking safer havens for their capital amidst the volatile market conditions, found money market funds increasingly attractive. These funds offered a more secure investment option with the potential for higher returns compared to other riskier assets, prompting a substantial shift of capital into them.
Flash-forward to today, the amount of capital in the funds continues to rise at a rapid rate, showing no signs of slowing down, even though the Federal Reserve has shifted its monetary policy and is now in the process of cutting interest rates. This unexpected trend highlights the persistent appeal of money market funds as a safe haven for investors' cash, despite the changing economic landscape.
“In this topsy-turvy world, money market funds (MMFs) have emerged as a premium destination for investors’ cash, offering a sense of security and stability in uncertain times. The financial environment has not yet returned to what many would consider ‘normal’, and for the past two years, Treasury yields have consistently remained below the federal funds rate, further enhancing the attractiveness of these funds.”
As for the question of if, or when, money market funds will begin to witness outflows, Bank of America strategists provide some insight, suggesting that such outflows typically occur about a year after the first rate cut is implemented. This historical pattern indicates that investors might start withdrawing their capital from these funds around September of next year, assuming the current trajectory of rate cuts continues.
