With investors facing continued uncertainty from the pandemic, many are building larger-than-normal cash positions, with government money market funds and bank balance sheets a preferred destination. The intensity of that dash for cash has surpassed even 2008 levels
The least glamorous investments on Wall Street have become some of the hottest places to be as investors worry about the unpredictable duration of the COVID-19 crisis and the risk that recent rallies in stocks and other risky assets may be overdone.
That buildup of cash has benefitted money market funds, bank deposits and gold, among other areas. Investors have turned to government money market funds faster than they did in the 2008 collapse, with some funds even closing their doors to new investments.
Financial and non-financial institutions alike have deposited cash on bank balance sheets at a rapid clip. Much of the money is coming from government money market funds, whose managers have cash rushing in and sometimes nowhere else to put it that is generating any yield.
“Historically, trust banks see the biggest deposit increases in times of stress,” said Brian Foran, analyst at Autonomous Research. He put most of the increase in deposits down to a “huge flight-to-safety” and “cash-is-king mentality” among asset managers, as well as corporations drawing cash on revolving credit lines in an uncertain environment.
US Treasuries still appear to be some of the most sought-after securities. A stampede for Treasury bills in March briefly sent their yields into negative territory for the first time in four years. Those yields are still anchored near some of their lowest points of the year, even with the government borrowing to fund more than $2 trillion in economic stimulus packages.
Companies have also paid more than normal to borrow in the commercial paper market. Many non-financial corporates rated A-2/P-2 drew down on their bank liquidity lines and were limited to issuing commercial paper in maturities of one week or less because the volatile market conditions prevented them from issuing debt longer than seven days.
Activity in most markets has stabilized since central banks announced a series of emergency actions in March. The Fed has facilities not just for Treasuries but for everything from highly rated corporate debt and fixed-income exchange-traded funds to mortgage bonds, municipal bonds, commercial paper and bank certificates of deposit.
Those programs are driving rates lower but have also increased the Federal Reserve's balance sheet to more than $6 trillion from $4 trillion as recently as December. Some people expect it to grow to as much as $10 trillion, an unprecedented level.
The rush into government funds accelerated when they were paying a higher yield than Treasury bills themselves. In late March, the majority of the bills market experienced negative yields, including for debt as far out as December. The last time that happened was 2015.
Yields on one-, three- and six-month bills briefly started rising again in early April as the federal government issued more debt to help pay for its economic stimulus and the delay in federal tax collections. “We were able to get on the phone with the US Treasury to reinforce the need for a lot more cash-management bills,” said Brignac at Invesco. But yields fell again in mid-April and remained at depressed levels through the second half of the month despite robust issuance, indicating safe assets were still in high demand.
As money flooded into government funds, it flowed out of "prime" funds, which buy commercial paper and certificates of deposit. In March, investor desire for liquidity led to nearly $150 billion in outflows, more than double what came out in 2008.
Banks have offered to buy securities from prime funds if they get squeezed by redemptions. BNY Mellon purchased $3 billion in securities from both its own affiliates and third-party money market funds in the first quarter, and continued buying more in early April.
US money market fund assets exceeded $5 trillion for the first time as of April 27, up about $1 trillion year-to-date, with monthly inflows to that point into prime funds now positive again at $75 billion and government funds up $350 billion, according to Crane Data
But some government funds with high expenses are already waiving management fees to prevent their yields going negative.
Moody's Investors Service said in an April 16 note that it expects assets in the Fed’s new money market fund backstop to increase if short-term money market liquidity remains tight and uncertainty over the virus persists. The liquidity facility held $48.8 billion in assets as of the week ended April 22, down from a peak of $53.2 billion on April 8 after the market's initial struggles.
Some of the keenest signs that traditional havens were not behaving normally were in what are supposed to be the safest investments. In March, traders said several banks were not quoting prices for Treasuries and there were reports of a shortage of physical gold bars.
Rates on commercial paper maturing in three months and longer briefly rose back to levels last seen in 2008, despite the Fed backstop. In the week ended April 16, tier-II issuers only sold a daily average of $1.5 billion in commercial paper maturing in 10 days or longer, compared to $2.4 billion in the week ended March 6 and $868 million in the week ended March 27.
“Although as a Tier II, you are a fairly strong investment-grade company, you were having to play a high wire act” by borrowing over just a couple of days at a time, said Tom Deas, chairman of the National Association of Corporate Treasurers.
Meanwhile, insured cash sweep products have grown by their largest monthly dollar amount in the program’s history, which dates back to 2011. Balances in April were 35% higher than they were at the start of the year, according to Promontory Interfinancial Network, a US network of about 3,000 banks that hold $375 billion in US deposits.
An insured cash sweep is a product that allows investors to federally insure large dollar deposits by placing blocks of cash with multiple banks through one intermediary — BNY Mellon included — at one interest rate. Operationally, the client funds stay on deposit until the client places a withdrawal and the money is put back in their operating account. “With everything happening in the world, safety matters,” said Joseph Hooker, senior managing director at the Promontory network.