$166B Rush Into Cash as Bond Yields Hit 24-Year Highs

Bank of America reports that investors poured $166.4 billion into money market funds over a single week. The last time cash moved in at such a pace was during the Covid crash in April 2020.

The trigger for the panic was not equities but the bond market, traditionally viewed as the world's safest asset class.

How the Bond Market Pushed Investors Into Cash

When the U.S. government needs to borrow, it issues bonds, and the interest paid on them is referred to as the yield.

Rising yields make existing bonds less attractive. A bond yielding 4% becomes undesirable when newer ones offer higher returns.

During this period, the 10-year Treasury yield climbed to 5.36% — a level not seen in roughly 24 years. The 30-year yield reached 5.70%.

Forbes attributed the surge to oil-driven inflation, a September rate increase from the Federal Reserve, and a $1.9 trillion federal deficit.

That drove investors toward money market funds. These vehicles lend cash for short durations, predominantly to the U.S. government. Their share price remains near $1, allowing holders to collect interest without seeing their principal decline.

Wall Street Splits on Whether Cash Is the Smart Bet

Michael Hartnett, a strategist at Bank of America, believes the funds will remain on the sidelines until the Fed reduces rates.

“No rate cuts, no cash cuts,” said Michael Harnett, Chief Strategist at Bank of America.

Traders assign no probability to a rate cut at the Fed's October gathering.

Not all investors are retreating. Jim Bianco, who has been bearish on bonds for six years, has shifted to a bullish stance. He contends that 5% yields now align with the economy's growth rate.

Equity investors receive a warning from Ray Dalio. He argues that climbing yields are shrinking the protective cushion that has shielded stocks.

The cryptocurrency market also felt the impact. Crypto funds experienced $600 million in outflows that same week, while gold attracted $2 billion.

Bank of America notes that money market assets are now close to $8 trillion, up from $5 trillion in 2023. According to Hartnett's logic, that capital will remain parked until the Fed makes a move.