Macroscope | Money markets are flush in ‘cash is king’ environment but interest rate cuts are coming

For cautious investors who don’t want to hold money in low-interest-paying bank accounts, money market offerings like government bonds are attractive

But with interest rates set to peak, those seeking returns may have to venture into riskier assets

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Customers queue on February 3 outside the Bank of Spain, Spain’s central bank, in Madrid to buy short-dated debt known as letras that was offering a return of nearly 3 per cent. Photo: Bloomberg

Published: 9:30pm, 19 Apr 2023

Markets have settled somewhat after the banking distress in the United States and Europe over the past month. Central banks and governments have responded swiftly to the turmoil, triggered by the demise of three regional banks in the US and Credit Suisse.

Liquidity provisions have come quickly and with generous terms. Resolution decisions have also been made rapidly in both the US and Switzerland. The risks to financial stability, it seems, have been mitigated, yet market conviction remains absent.

Macroeconomic uncertainties and concerns about financial stability continue to undermine investor sentiment. It seems we are in a “cash is king” environment.

With central banks focusing on the battle against inflation, short-term interest rates remain high, with safe assets like Treasury bills – US government bonds – appealing to investors who don’t want to hold money in low-interest-paying bank accounts and who are fearful of taking on risk. The flows are evident in the US with money market funds benefiting from deposit drawdowns at banks, particularly smaller regional banks.

The “cash is king” phenomenon reflects the relative attractiveness of interest rates offered by low-risk assets. Yields on US three-month Treasuries stand above 4 per cent. For euro-denominated bonds, the yield is around 3 per cent. Other than for exceptionally large deposits, banks are not paying rates anywhere near these for their regular savings accounts.

It is always tempting to try and simplify what generates flows between bank accounts, cash-like instruments and other investment assets. Yet we can observe a general decline in bank deposits in the US and a rise in the assets of money market funds.

Macroscope | Money markets are flush in ‘cash is king’ environment but interest rate cuts are coming

For cautious investors who don’t want to hold money in low-interest-paying bank accounts, money market offerings like government bonds are attractive But with interest rates set to peak, those seeking returns may have to venture into riskier assets

For cautious investors who don’t want to hold money in low-interest-paying bank accounts, money market offerings like government bonds are attractive

But with interest rates set to peak, those seeking returns may have to venture into riskier assets