$6T Stashed In Money Market Funds Set to Shift To Riskier Assets As Rates Decline

Cash has been king for a long time, but could the Fed’s recent rate cuts finally dethrone it? Last week, the Federal Reserve lowered the benchmark interest rate by 0.5%, signaling more cuts ahead. As a result, most money market fund assets now offer a ~4.5% yield, holding over $6T in assets. The Fed says these cuts are aimed at boosting the labor market and managing a slowing economy — but they’re also likely to push investors to move away from the safety of cash and into more active investments.

• Bank of America recommends dividend-paying stocks, noting that over 200 S&P 500 stocks currently provide better real returns than the 10-year Treasury yield.
• JPMorgan suggests extending duration and locking in yields, pointing out that bonds typically outperform cash when rates are cut.

Where’s the money headed? While some experts foresee a mass exodus from cash, others are more cautious. Federated Hermes’ Deborah Cunningham predicts money market funds could even grow to $7T, as history shows investors often wait for rates to drop below 1% before making moves. Though many anticipate money flowing into higher-yielding assets,the shift may be gradual rather than a rush. Columbia Threadneedle’s Gene Tannuzzo calls the current trend of sticking to low-risk cash investments “T-bill and chill,” suggesting lower yields aren’t enough to scare off significant cash holdings just yet.