The place to be
Cash has become a compelling asset class.
Chair Jerome Powell’s speech at Jackson Hole, Wyo., cleared up any lingering uncertainty about the Federal Reserve’s resolve to crush inflation. In our opinion, it also furthered the case for viewing cash as a compelling asset class, something many investors already have during this aggressive tightening cycle.
As stocks and bonds struggle anew, liquidity investments no longer just offer shelter from volatility or serve as a base camp for future allocation. Rather, they have been providing a growing return. The Crane 100 Money Fund Index (the average of the 7-day yields of the 100 largest taxable money market funds) hit 2% on the last day of August, while equities retreat, Treasury yields rise and deposit-product interest rates lag.
Furthermore, stocks, bonds and a host of other investments have heightened principal risk. Preservation of principal is a hallmark objective of liquidity products, from money market funds to investment pools. While asset flows to money funds have been both up some and down some this year, as investors have realized the Fed is not backing down, total industry assets have risen above $4.5 trillion. That’s not far from all-time highs.
We expect industry assets under management to keep growing now that Powell has taken the wind out of the sails of those betting inflation has peaked. Brevity is not his strong suit, but his Jackson Hole speech at the Kansas City Fed’s central bank symposium in late August lasted around eight minutes and was as clear as the mountain air. It helped that a press conference didn’t follow, as those can muddle the message. With other Fed officials toeing the line, it’s likely that the story of the September Federal Open Market Committee meeting won’t just be another large 75 basis-point hike, but an indication that rates might be higher sooner and for longer. In our opinion, this is not the time to lock oneself into a long-term contract or buy securities too far out the yield curve.
As we’ve said before, the period between the onset of a tightening cycle and its first meaningful impact on an economy is often a half year, heightening the importance of the September meeting as it comes around six months after the first hike in March. The Summary of Economic Projections, dot plot and—especially if he can stay on message—Powell’s press conference should offer a significant amount of information and insight about the Fed’s path forward.
And let’s not forget that the Fed will double the amount of the reduction of its balance sheet in September, allowing $95 billion to roll off each month ($60 billion in Treasuries and $35 billion in mortgage-backed securities). We estimate that is the equivalent of another quarter-point of rate tightening, putting even more fangs in the Fed’s bite. This also will bring more Treasury bills to a market that has been operating under a dearth of supply for some time now.
To capture the rising rates, we have kept our target weighted average maturities (WAMs) short. Very short in the case of our prime money funds, which sit in the 15-25 day range, with our government and municipal products targeting 25-35 days.