Everyone — from moms and pops to corporate treasurers and the mega asset managers — is piling in, won over by a unique opportunity: To lock in a 5% yield, and protect themselves from uncertainty over the US economy.
Demand has been so robust, the amount of bills sitting on balance sheets of primary dealers, the first port of call for Treasury debt sales, plummeted to about $45 billion last month after touching an all-time high of $116 billion in July. It has also made the paper more expensive, driving the difference between bill yields and so-called overnight index swaps — which investors use to measure the Fed’s path — back toward zero after climbing into positive territory for the first time since 2020.
Cash-like instruments had been perceived as an attractive investment before the 2008 financial crisis led the Fed to slash interest rates and hold them at zero for nearly a decade. Now, after another bout of near-zero rates during the pandemic, the Fed’s historic ramp-up in rates has yields for risk-free assets like T-bills relative to what one can earn at banks once again a worthwhile place to invest excess funds. Below is a ‘who’s who’ guide to the buyers flooding into bills.
Moreover, the three largest corporate cash portfolios — Apple Inc., Google parent Alphabet Inc. and Microsoft Corp. — showed a “notable increase” in commercial paper, as well as short-dated US government securities captured under cash equivalents, and a corresponding drop in holdings of longer-dated securities, according to JPMorgan.
In order for portfolio managers to recycle back into risk assets, McClain said credit spreads need to widen relative to bill yields, and the S&P 500 drop by 10% drop. A 20% slide would make it a more compelling buy, he added. “It’s a weird scenario in that you have a very favorable upside/downside capture in cash,” he said, adding there’s “a more normal to slightly unfavorable scenario going out the curve.”Despite the rush into T-bills, more than $880 billion has flowed into the money-market industry this year, bringing the total to an all-time high of $5.62 trillion as investors park cash in higher-yielding, liquid instruments amid uncertainty over the direction of Fed tightening.
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