“This may be the peak before it all falls apart again.”
So said Peter Crane, president of Crane Data, on Monday, the first day of the Crane’s Money Fund Symposium, which bills itself as the largest meeting of money-market fund managers and cash investors in the world. He added that he was putting a positive spin on the industry by noting that assets were rising when balances typically fall. The amount of money in government and prime funds has soared in 2019 to more than $3 trillion, the most since the financial crisis, driven by U.S. short-term yields exceeding those of longer-maturing bonds.
On its face, the impetus to park money in ultra-safe money-market funds makes a lot of sense. After all, equities are at or near all-time highs, corporate-bond spreads have tightened across the board, and, again, the yield curve is inverted, inevitably raising the specter of a coming recession. In fact, I posited in late March that inversion would most likely accelerate the dash for cash, after noting that during January and February, individual investors bought $39 billion of Treasury bills at auctions, the most since at least 2009.
You've Come a Long Way
There’s one obvious difference between then and now. Three months ago, the Federal Reserve was firmly on pause, with officials signaling they were in no hurry to move interest rates. Now, the bond markets consider a rate cut in July as a virtual certainty and expect the central bank’s benchmark lending rate to be about 75 basis points lower by the end of the year.
Make no mistake: Such steep cuts would most likely roil money-market funds. Crane and others at the industry gathering in Boston are putting on brave faces, but the simple truth is that a return to the post-crisis policy of pinning short-term interest rates near zero would force many investors to withdraw their money and seek higher-yielding alternatives.
The problem, of course, is that those other options are few and far between. My Bloomberg Opinion colleague Marcus Ashworth recently wrote about the “madness” of 100-year bonds from Austria that may yield 1.2%. Bloomberg News’s Cameron Crise described the plight of a friend who had plowed money into six-month bills around the start of the year and doesn’t know where to invest the principal now that the rate on those Treasuries is some 50 basis points lower. It was 2.38% as recently as May 30; it’s 2.08% now.
It’s true that Treasury yields across the board have moved swiftly lower in recent weeks. The benchmark 10-year yield is back below 2%. The five-year yield, which reached as high as 3.1% in November, is now just 1.72%. And this is happening even though the median projection among Fed officials on their “dot plot” is for unchanged rates in 2019 and one cut in 2020.
This divergence in expectations between policy makers and bond traders means the mad grab for yield could only intensify if the Fed follows through with lowering interest rates next month. And if that’s the case, investors would be better off leaving money-market funds now in favor of Treasuries with some duration.