Deutsche Bank analysts Keith Parker, Parag Thatte, John Tierney and Binky Chadha, in their report “Investor Positioning and Flows,” on October 11, examine investors’ recent flight to the safety of the money market.
Events driving investors to stockpile cash
In a chain of negative events comprising the May ‘taper’ threat, action in Syria, and most recently the U.S. Government shutdown, have curtailed the risk-taking tendencies of investors. The authors say investors have parked $120B in cash in money market funds since May, and this was rather similar to an earlier ‘risk-off’ event: last year’s fiscal cliff. At that time panic flows into money market vehicles touched $160B.
Equities have reported outflows for the third consecutive week with almost $6.5B flowing out last week alone. Outflows from U.S. funds have to some extent benefited funds in other areas such as Japan and Europe. In an interesting sidelight, large and small cap funds saw outflows last week of $6.2B and $2.1B respectively, but midcaps saw an inflow of $0.9B.
Bonds untouchable after taper hint
The hint of the proposed taper, even though it did not materialize, has made a permanent dent in investors’ appetite for bonds, and fund flow to the bond market has turned negative post-May.
Heavy outflows have been witnessed from both U.S. and Emerging Market bonds in recent weeks, while a continuing outflow is observed from IG and government funds.
Will history repeat itself?
After the fiscal cliff fears wound down last year, funds moved out of the security of money markets and back into the equity and bond markets – both benefited from investors’ newly returned risk appetites, especially in the early part of 2013.
This scenario may repeat itself this time around if Washington gets its act together and avoids default… but with a twist. Funds would likely flow to equities but not, like last time, to bonds.