Invesco asks 'Will cash be king?'
Invesco Senior Client Portfolio Manager Rob Corner posted a blog piece entitled, "Will cash be king as the Fed hikes rates? this week. Subtitled, "Cash yields have risen along with rates, which may help investors reduce duration risk," the brief says, "US money market fund balances recently reached their highest level in seven years and, according to Crane Data, average money market fund yields crossed the 1% threshold for the first time since November 2008. Invesco Global Liquidity believes that more investors may consider cash and conservative fixed income solutions as part of their active asset allocation in the near term for multiple reasons.... Yields on cash and conservative low duration vehicles have become more attractive since the US Federal Reserve (Fed) began removing monetary policy accommodation and moved away from a near-zero federal funds rate. Since December 2015, this policy shift has driven the federal funds rate higher by 125 basis points. As the Fed continues to push the federal funds rate higher, we expect yields on US money market funds and other cash and conservative low duration vehicles to become even more attractive on a relative basis." Corner explains, "Invesco Global Liquidity believes cash and conservative low duration vehicles could outperform short-term and intermediate fixed income strategies during the current Fed hiking cycle. In each of the last five Fed tightening cycles, the three-month US Treasury bill index outperformed 1-3 year, 1-5 year, and 1-10 year government and credit indices.6 The average of this relative outperformance ranged from just over 100 basis points, annualized, versus the 1-3 year index, to more than 200 basis points, annualized, versus the 1-10 year index.... In this environment, we believe an active allocation to cash and conservative low duration strategies may be considered by investors as a method to help reduce overall fixed income duration risk." He adds, "The newly signed Tax Cuts & Jobs Act of 2017 could result in modest increases in bank deposits and US money market fund balances as corporations are incentivized by lower tax rates to bring cash back onshore. While the amount and extent of repatriation remains to be seen, we believe these asset flows may be smaller than expected, and we anticipate limited impact on money market rates in the near term. We believe any increases in US money market fund balances due to repatriation are likely to be orderly and relatively short-lived, as corporations ultimately redeploy their cash to reduce debt, reward shareholders, increase capital expenditures, pursue mergers and acquisitions, and/or benefit employees. Regardless of the eventual use of cash, US money market funds and other cash equivalents should be an important parking spot for these balances.... Recent history has demonstrated the value of cash during a Fed tightening regime. We believe investors may wish to consider an active allocation to cash and conservative low duration strategies to capture these market dynamics that favor cash and potentially reduce interest rate risk."
