“Not only do money-market funds tend to experience a surge in seasonal inflows during this time of year, supporting higher AUMs, but money-market fund outflows also typically do not occur until the Fed is further along in its easing cycle,” JPMorgan strategists Teresa Ho and Pankaj Vohra wrote in a Friday note to clients.
The Fed is expected to lower borrowing costs for the first time in four years at its policy meeting later this month, although the size of the reduction is still up for debate.
Strategists at Bank of America and Barclays also recently argued that the beginning of the central bank’s easing cycle will not weigh on money-market activity. BofA’s Mark Cabana and Katie Craig wrote that the Fed’s target rate would have to drop below 2% before investors move money into other, higher-yielding fixed income.
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JPMorgan strategists expect to see “moderate” near-term outflows, historically an average of about US$30 billion, because of corporate tax payments around the mid-September deadline, but sizeable moves will likely wait until 2025.
Underpinning the bank’s view is the fact that the front-end of the US Treasury yield curve remains deeply inverted, with the spread between the three-month and two-year maturities negative by some 140 basis points at current levels.
Only when the curve returns to its normal shape, turns positive, will investor behavior shift, Ho and Vohra wrote, noting “liquidity investors tend to also be yield investors.”
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“On average the curve becomes positive three months after the first ease, suggesting it might take that long before cash meaningfully shifts out the curve,” they said.
