Stocks and Bonds Both Unstable... Global IBs Accumulate Cash

by Park Pyunghee

Published 26 Apr.2022 10:47(KST)

[Photo by AP Yonhap News]

[Asia Economy Reporter Park Byung-hee] The Wall Street Journal reported on the 25th (local time) that major institutional investors are increasing their cash holdings amid rising financial market uncertainties due to the Ukraine war and concerns over China's economic slowdown following strict COVID-19 lockdown measures. With the risk of price declines rising in both stocks and bonds, investors are focusing more on preserving cash than on investing.

Rick Rieder, Chief Investment Officer (CIO) of Fixed Income at BlackRock, the world's largest asset management firm, said, "We have increased cash holdings among investment assets by more than 50%," adding, "The cash proportion is much higher compared to the past few years." Rieder noted, "Since central banks worldwide are raising benchmark interest rates, the stock market will experience volatility for a short term of about two months to as long as six months," advising, "The most attractive thing investors can do in the current situation is to be patient."

According to Bank of America's (BOA) April fund manager survey, cash holdings surged to the highest level since April 2020.

The money market fund (MMF) market, which attracts short-term funds when suitable investment options are scarce, is also expanding. According to the Investment Company Institute (ICI), the prime MMF market size grew from $146 billion at the end of February to $193 billion last month.

MMFs, classified as cash-equivalent assets, primarily invest in short-term government bonds, high-credit corporate bonds, and commercial paper. During periods of interest rate hikes, they can expect returns similar to the rising rates. BOA forecasts that the U.S. benchmark interest rate, currently at 0.25-0.5%, will rise to around 3% by early next year. This is nearly twice the current dividend yield of the S&P 500 index.

BOA investment strategist Kwon Oh-sung explained, "If the cash yield is 3%, it is not a favorable environment for risky assets like stocks." Gaurav Malik, Chief Investment Strategist at State Street Advisors, said, "Considering the expected returns, cash is the best option right now," adding, "We have increased cash holdings by more than 50% compared to the beginning of the year."

Moreover, with recent U.S. bond yields rising to match inflation expectations, risk-free returns from bond investments have become possible. On the 20th, U.S. Treasury yields rose intraday to 2.98%, surpassing the 10-year inflation expectation. The 10-year inflation expectation, calculated by the difference between the 10-year nominal Treasury yield and the 10-year Treasury Inflation-Protected Securities (TIPS) yield, was 2.92% that day. This means that holding bonds to maturity can yield interest returns exceeding inflation. This is the first time since March 2020 that risk-free returns through bond investments have become feasible. Although there is a risk of bond price declines, it is now a favorable environment to hold bonds to maturity with the mindset of preserving cash.

Major banks are also focusing on preserving cash rather than investing. Jamie Dimon, Chairman of JPMorgan Chase, announced on the 13th during the first-quarter earnings report that the bank increased its loan loss provisions by $920 million in the first quarter of this year. Loan loss provisions refer to funds set aside to prepare for potential future investment losses.