Investors and companies have started to redeploy the record amounts of cash they stashed in ultra-safe money market funds at the height of the Covid-19 turmoil, eager not to miss out on a rapid recovery in riskier assets.
Money market funds received $1.2tn of inflows between March and May, according to data from the Investment Company Institute. These cash-like funds are popular with corporate treasurers looking for a place to put spare cash, and investors looking for a haven in periods of market stress.
But these funds have now experienced outflows for four consecutive weeks, totalling almost $105bn. Portfolio managers and bankers report that some investors are diverting cash into higher-yielding investments, such as corporate bonds.
“As things started to calm and normalise, [corporate treasurers] would say, ‘I’m earning 20 basis points at best, really closer to zero. Hmm, if I were to buy a high-grade corporate bond fund I could probably get around 1.5 per cent,’” said Jim Caron, a senior portfolio manager for global fixed income at Morgan Stanley Investment Management.
Retail money market funds have also recorded withdrawals, although the pace has been slower than the outflows from institutional accounts, the ICI data showed.
Nick Maroutsos, co-head of global bonds at Janus Henderson, attributed the shift to a “massive fear of missing out” among investors who have watched as stocks and riskier corporate bonds have rallied sharply from their March lows, encouraged by unprecedented support packages from the Federal Reserve and the federal government in Washington.
Despite a grim economic outlook as coronavirus cases surge in parts of the US, the S&P 500 has clawed back most of its losses for the year while the technology-heavy Nasdaq Composite has set new highs. Investment-grade US corporate bonds, meanwhile, have returned 4.8 per cent in 2020 so far, according to index provider Ice Data Services.
“People are taking money out of quasi-conservative investments and pushing into riskier investments given the fact that there is an implicit backstop by the Fed,” Mr Maroutsos said. “People are saying that if the Fed is going to back stock markets, or put a floor under debt markets, I might as well look to get a return that’s higher than what you get in [money market funds].”
Companies have borrowed more than $1.2tn through US debt markets this year, after rushing to fortify their balance sheets against the economic downturn. Much of that cash made its way into money market funds, which still held a near-record $4.7tn in the week to June 17. The majority of that is in funds that invest in short-term government debt.
Withdrawals from money-market funds are a sign that companies are beginning to dig into those “war chests”, said Jack Janasiewicz, a portfolio manager at Natixis Investment Managers. Many are moving to pay off bank credit lines drawn at the depths of the crisis, he said, encouraged by the easing of virus-related lockdown measures.
Since March, the Fed has moved quickly to support financial markets and the economy. In addition to slashing interest rates to near-zero and committing to buying an unlimited quantity of Treasuries and agency mortgage-backed securities, the central bank has rolled out 11 emergency facilities to shore up markets, including for municipal debt and riskier corporate bonds. The Fed has also said it will expand the scope and scale of the programmes, should market conditions warrant it.
“This has been a super unloved rally in risk assets,” said Eric Stein, co-director of global income at asset manager Eaton Vance. “Given the Fed stimulus, you could have financial markets that continue to outpace the economy for some time.”
Even with the shift into top-rated bond funds, Mr Stein said that investors were likely to maintain higher balances of cash and cash-like investments until they know more about the length and severity of the pandemic.
“It makes sense just given the shock nature of what happened,” he said. “It will take time to work it out of the muscle memory of investors and [companies].”