This year, investors have heard numerous warnings about "over-allocation of cash." However, with the current market sentiment being tense, it is unlikely that investors will suddenly change their strategies, as they keep approximately $6.5 trillion in money market funds, earning roughly a 4.8% return.
Since September, strong U.S. economic data has led to a repricing in the bond market, with investors reducing expectations for Federal Reserve rate cuts in the coming months. Recently, the market has also been digesting the potential risks of Trump winning the November election, where his tariff and tax cut policies could be reignited.
Hong Mu, portfolio manager at Penn Mutual Asset Management, stated in a telephone interview on Wednesday, "These factors are all detrimental to interest rates, which is why we have seen rates rise over the past few weeks."
Mu pointed out that investors typically consider relative value when making asset allocation decisions. However, when the yield on investment-grade corporate bonds is slightly above 5%, and the yield on the 10-year Treasury note is 4.25%, the question becomes: Is it worth moving funds from money market funds?
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He further explained that facing the choice between increased risk and return is indeed a difficult question to answer. Mu believes that now might be a good time to wait and see before making a decision.
From historical experience, investors usually do not withdraw from money market funds on a large scale before the Federal Reserve makes significant rate cuts. Although the Federal Reserve cut rates by 50 basis points in September, its short-term rates remain at a historical high of 4.75% to 5%. According to the Federal Reserve's latest forecast, the rate range is expected to be between 3.25% and 3.5% by the end of next year.
Mu also said that the Federal Reserve may need to lower rates below 1% to trigger a large outflow of funds from the money market, a level that usually coincides with concerns about economic recession. Another trigger for outflows could be a significant increase in long-term bond yields, possibly due to fiscal issues or a new round of inflation panic.
Meanwhile, as Treasury yields rise, the stock market has recently retreated from historical highs, with the Dow Jones Industrial Average down 0.96%, the S&P 500 down 0.92%, and the Nasdaq Composite down 1.6%.