Money Market Flows Are Robust as Short-Term Interest Rates Rise

Latest data as of 15-Mar-2023
Source: Deutsche Bank, The Daily Shot

• Savers are rejoicing with some of the highest safe yields seen in more than 15 years
• Investors overweight cash must acknowledge reinvestment risk and have a plan should stocks rally or if near-term yields fall later this year
• Defensive positioning could set the stage for better return as 2023 progresses
  

There’s no doubt cash is attractive right now. You and I can earn more than 4%, virtually risk-free, in a money market mutual fund or by owning very short-term Treasury bills. With volatility returning to the stock market and some of the biggest moves in the bond market since late 2008, what’s not to love about earning significant interest income from a boring money market fund? Well, the big risk is something few investors consider when hiding out in the warm blanket of cash: reinvestment risk.

Think about it like this — holding a large cash buffer is fine in the short run. After all, it’s liquidity you can use to pounce on market dips, but that kind of market timing can be perilous should stocks climb over the coming months. Even a modest return of confidence in the stock market could yield significant returns based on the current mood and investor positioning. Reinvestment risk is the chance of simply getting back in only after equities have jumped.

And even if stocks ebb or even drop, the fear caused by such a downward move often paralyzes cash-heavy investors. Earlier this month, another global financial crisis may have felt inevitable, so buying that pullback was a challenge. Will it prove to have been an ideal time to add to stocks? We do not know yet, but with large inflows into money markets in the last six months, dry powder is building for potential investor buying later this year.