Just how much cash is sitting on the sidelines? That’s a question many people are asking right now, with seemingly everything (except the US dollar) rising.
Fortunately, Tim Bond, the head of asset allocation at Barclays Capital, is on hand to provide some answers. From the latest edition of his Global Speculations:
Since early March, $423bn has left money market funds, presumably in search of higher returns in alternative assets. A good portion of this cash appears to have found its way into longer-term mutual funds, primarily bond and credit funds. Since March, net inflows to such mutual funds have been in the region of $234bn, with monthly inflows running at record highs.
Bond says it is important to note that these flows are accelerating and will continue as long as short term interest rates remain around zero:
The rolling 12-week annualised pace of outflow has rise from an average of $200-300bn in March-April to an average of $780bn in September (see Figure 2). It is reasonable to presume that these flows are making their way out along the risk curve in search of higher yields, the bond markets being the initial destinatioAnd that the move out of cash into other assets is a clear signal that the financial system is healing itself:
The collapse of the secondary or shadow banking system resulted primarily from money market investors refusing to buy asset-backed commercial paper. These flows, having retreated down the yield curve and up the credit curve, are now beginning to flow back into the capital markets. The infrastructure of the shadow banking system may very well have disappeared, but the liquidity that financed the system is starting to return. Same money, different intermediary, one might say.
And here is all of the above in pictorial form:
Related link:
Tim Bond reckons the real risk is on the upside – FT Alphaville