The $3.4T haven where investors ‘hide out for a while’
As fears of a global economic slowdown deepen and stock prices swing wildly, many U.S. investors are running for cover in money market funds.
Extended trade tensions between the U.S. and China are exacerbating concerns of a recession that will force the Fed and other central banks to cut rates and turn to further stimulus. That has triggered a rally in Treasurys which pushed yields on even 30-year government bonds to near or below those of short-term assets held by money market funds, which are still yielding close to 2.2%.
Money market mutual funds saw $18 billion of inflows in the week ended Wednesday, pushing total assets to an almost 10-year high of $3.35 trillion, data from the ICI show. The flows are partly driven by the desire for investors to “take some chips off the table and hide out for a while,” said Rob Sabatino, global head of liquidity at UBS Asset Management, which has $831 billion under management.
Institutional and individual investors have few better places to park their cash given that bank deposit rates are significantly lower and market volatility has erupted in August. Many investors are simply “parking it in cash,” Sabatino said, using the industry short-hand for money market mutual funds.
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The delicate psyche of investors is on display almost everywhere these days: in interest-rate swaps and an inverted term structure; spreads between short- and long-term Treasury yields dipping below zero; and below-average measures of market depth in stocks, bonds and currencies that point to illiquidity.
One metric derived from the implied volatility on one-month and one-year options on 10-year interest rate swaps, in particular, is flashing panic. The term structure is now more inverted than it was during the Treasury bond-market flash crash of October 2014.
Poor liquidity across stocks, Treasurys and currencies for the month of August is being reflected in reduced market depth, according to JPMorgan Chase. Depth refers to the number of standing bids and offers from potential buyers and sellers. When it decreases, it makes it harder to buy or sell large positions fast without affecting the price of the underlying asset.
Add to that mix $16 trillion in negative-yielding bonds around the world, stocks falling from record highs and memories of the 2007-2008 financial crisis, and investors are showing a preference for funds that stand the best chance of not losing money.
There are signs that “people are afraid and they’re more concerned about preservation, or return of capital, than they are about return on capital,” said Guggenheim’s Scott Minerd.
Not many are ready to call for a repeat of the 2007-2008 global financial crisis just yet, though some investors are concerned about where market instability may manifest during the next recession. The next downturn could see instability spread to places like student debt, auto loans, leveraged loans or high-yield bonds, says JPMorgan strategist Jan Loeys, who sees a growing risk that U.S. yields eventually will fall to zero.
“Investors are looking for a safe-haven place to take cover that’s not subjected to volatility,” said Debbie Cunningham, chief investment officer of global money markets at Pittsburgh-based Federated Investors, which has $502 billion under management. With Federated cash funds yielding around 2.1% to 2.3%, compared with a two-year Treasury yield hovering around 1.5% and a 30-year rate of 1.98%, money market funds are “still pretty attractive and looking better than debt securities.” – Additional reporting by Scarlet Fu