Money Market Fund liquidity has been drawn down to around $2.5 tril currently compared to the
peak reserve levels of $3.6 tril. in the spring of 2009, near the cyclical bottom in the stock market.
The aggregate MMF balance now is also below Half 2 '2007 levels when the stock market made
all time highs. Funds can be drawn lower, but it is unwise to think there is much "sideline cash"
sloshing around. Moreover, Since the growth of aggregate business sales has been far more rapid
then the advance in my broad measure of credit driven liquidity during the economic recovery, there
has been full absorbtion of systemic liquidity (excluding MMFs) by the real economy over the past
two years. The systemic drain on liquidity by business has intensified in recent months because the
banks, perhaps fearing an economic slowdown, have let large deposit and commercial paper
balances run off.
For now, one has to look more closely at inter-market transfers of funds to support the stock market.
Thus, a bull run in stocks, should one occur, might be more reliant on proceeds from the sale of
of fixed income securities running from two year maturities on out. Since you have to head out to
10 year T-notes to pick up a 2% current return, and since the SP 500 yields about 2.2%, there would
be little "give up" of income for players choosing stocks. However, it is important to realize that
a bull move in stocks could materially penalize the fixed income portion of many portfolios as
funds migrate to stocks.
5 Year T-note Yield
1 comment:
With all due respect, an investor has to be deaf, dumb, and blind to have money in a mutual fund based money fund yielding under 5bps. when bank and credit union money-market deposit accounts can yield around 1%.
With the changes in FDIC/NCUA insurance, it involves a little paperwork to get government insurance on up to $1.25 million per account, thus creating a safer and higher yielding investment.
Measuring the amount of TOTALLY brain-dead investment funds in cash isn't likely to provide any useful signal.
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