A $6 Trillion Wall of Cash Is Holding Firm as Fed Delays Cuts

For an asset class that many market prognosticators all but left for dead to start the year, there’s still plenty of life left in cash. 

Investors have added $128 billion to US money-market funds since the start of the year, Investment Company Institute data show. Companies were sitting on a record $4.4 trillion of cash at the end of the third quarter, and after a flood of more than $1 trillion of T-bills since mid-2023, the market has room for more. 

It’s a stark contrast to just a couple of months ago, when one of the hottest questions on Wall Street was where investors would redeploy all their cash holdings once the Federal Reserve started cutting interest rates and making stockpiles of money less appealing. 

But a lot’s changed since then. Traders have dramatically dialed back policy easing expectations, for one. The more time it takes the central bank to begin lowering its benchmark, the longer cash held in money-market funds should be able to earn 4%, 5% or more, keeping investors from looking further afield.

Add to that corporate executives who seem in little rush to spend money following the pandemic and depositors still worried about the state of the banking system, and all signs point to 2024 being another big year for cash. 

“The year of cash wasn’t a flash in the pan,” said Peter Crane, president of Crane Data LLC, which tracks the money-market fund industry. “The overall resensitization to interest rates is still spreading and even a lot of money hasn’t moved or looked at it yet.”

Cash had been a long-ignored option for most of the decade following the financial crisis as the Fed kept borrowing costs near zero. But that changed after a measured, three-year hiking cycle and the pandemic sparked a scramble for havens.

In 2022, the Fed embarked on the most aggressive pace of rate increases in decades, sending rates well above 5%, and everyone from asset managers to mom-and-pop investors took note of the attractiveness of money-market funds, T-bills and other short-term assets versus earning little-to-nothing on bank deposits. 

As a result, more than $1 trillion flowed into money funds last year, the most for any year seen in ICI records dating back to 2007. Those inflows helped money funds keep up with the ramp-up in T-bill issuance, and the gap between total money-market assets and total bills outstanding, albeit narrowing, still suggests there’s appetite for short-dated government debt.

Rate increases sent short-end yields soaring above longer-dated tenors and has the 3-month T-bill currently yielding about 5.37%, more than a full percentage point above the benchmark 10-year. While the so-called curve inversion carries a warning of a potential economic downturn, cash earning so much more at the short-end and in money funds paying similar rates is unlikely to shift out so quickly. 

Now with policymakers signaling a pivot to rate cuts, the debate is brewing over how much and how long this wall of cash will last. The timing of those reductions will play a role, and after the release of strong employment and inflation data this month, traders have ratcheted down their expectations for any move before mid-year. 

Late last year, BlackRock Financial Management’s Jeffrey Rosenberg said he was expecting a large chunk of the $6 trillion of money-fund assets to decamp for places like equities, credit and even further out the Treasury curve. Citi Global Wealth and UBS Asset Management were among firms echoing similar views.

For strategists at JPMorgan Chase & Co. led by Teresa Ho, only about $500 billion is susceptible to flight risk since the bulk of the money sitting there is used for cash management or liquidity purposes. 

Moreover, considering equities versus cash, “relative to expected earnings, cash is relatively attractive,” Barclays Plc strategist Joseph Abate wrote in a monthly report last week, comparing the 12-month forward expected S&P 500 earnings per share to the fed funds rate — a proxy for the return on cash.

On the flip side, about $1 trillion is set to flow into the industry in 2024 from companies that have yet to move cash en masse, according to Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes.

That’s borne out in ICI data showing retail investors accounting for about 80% of the $1.198 trillion that has flowed into the money fund space since March 2022, with institutions making up the remainder. 

“The expectation is if the Fed is at a peak or a plateau, institutional flows will start to pick up,” as companies outsource cash management to capture yield, Cunningham said. 

Some corporations have already boosted their money-fund holdings. Meta Platforms Inc., the parent company of Facebook, increased its allocation to money funds to $32.9 billion at the end of the year from $29.6 billion as of end-September, according to filings with the Securities and Exchange Commission. Amazon.com Inc. had $39.2 billion in money funds at the end of 2023 from $20.4 billion the prior quarter. Meta and Amazon declined to comment.

Qualcomm Inc., the world’s biggest seller of smartphone processors, increased money-market fund holdings in 2023, while its cash and cash equivalents rose to $8.13 billion as of Dec. 24 from $4.88 billion a year earlier. 

“For us, the cash balance is really strategic flexibility,” Akash Palkhiwala, chief financial and operating officer, said in an interview. “We want to keep it liquid and we want to stay at the lower end of the risk profile. So if you look at our cash balance, a lot of it is invested in money-market funds.”

Corporate cashpiles have risen as a percentage of gross domestic product to 16% as of the third-quarter last year from 12% in March 2020 due to the Covid liquidity shock, according to Tony Carfang, managing director at the Carfang Group. That’s an additional $1 trillion of cash companies are hoarding, he said, noting the tally reached $4.4 trillion in the third quarter. 

“Cash is absolutely fundamental to a corporate balance sheet and this is not dead,” Carfang said. But corporate treasurers may think holding that much cash is too conservative as the pandemic recedes from the collective memory. A more favorable regulatory environment for deal-making could also spur organizations to spend that money, he said.

For investors seeking to preserve income, Jerome Schneider, head of short-term portfolio management and funding at Pacific Investment Management Co., encourages clients to start adding interest-rate exposure — in particular the one- to two-year part of the curve.  

“Once we get to a point where the Fed is already cutting rates, it might be a little late for investors to continue to perform at a higher income,” Schneider said.

Even with cuts on the horizon, cash isn’t budging, according to Crane, who expects money fund holdings to reach $7 trillion this year, given unease about the banking system and the stack of uninsured deposits.

“I will eat my hat if money-market fund holdings were to decline from their current levels in 2024,” he said. 

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