March 3, 2021

Nervous Investors Chase Low-Risk Assets

Investors roared into Treasury bonds, cash and other low-risk assets on Thursday, acting on their fears about the weak global economic outlook on a day when stock markets in the United States declined more than 4 percent.

Just last week, the markets showed signs of nervousness about the government’s creditworthiness during a standoff over Washington’s debt limit. But on Thursday, yields on two-year Treasury notes touched 0.26 percent, the lowest ever, while the yield on the benchmark 10-year bond dropped 21 basis points to 2.41.

The low yields reflected a surging demand for Treasuries, which have long been considered almost as secure as cash. The 10-year rates approached depths not seen since October 2010, shortly before the Federal Reserve began to pump hundreds of billions of dollars into the economy amid fears of a slowdown.

Rates on even shorter-term credit, including six-month Treasury bills and overnight loans in the vast market for repurchase agreements, swung toward zero Thursday. Yields on one-month bills actually fell into negative territory before closing at zero.

Above all else, cash has become the investments of choice this week as the deepening economic and debt worries in the United States and Europe have made stocks look like a minefield to be avoided.

“The move to cash is symptomatic of a broader concern about growth and the stock market,” said Mike Ryan, chief investment strategist at UBS Wealth Management Americas. “It’s all part of a generic derisking exercise.”

Tom Forester, chief investment officer for the Forester Value Fund, based in Lake Forest, Ill., summed up the situation more succinctly. “Cash doesn’t go down,” he said.

Mr. Forester said he was shifting assets into a money-market fund that invests in Treasury notes. For other institutional investors, even money market funds seemed risky, and they instead sought the security of cash invested in commercial bank accounts.

The huge buildup in cash does not suggest that the world financial system is on the brink of another Lehman-like panic. But it does underscore the broader economic challenges facing both the United States and Europe, particularly the fear and uncertainty that has taken hold among companies, financial institutions and individuals.

Many companies are holding off on investing in new capacity and creating new jobs, instead stockpiling cash in case of another panic. And banks on both sides of the Atlantic are cautious about lending, restricting the money available to both businesses and consumers. Finally, individuals are clamping down on spending, too. Consumer spending in June dropped for the first time in nearly two years, according to government data announced earlier this week.

At the height of the uncertainty over whether the debt ceiling would be raised and with a potential default in the offing, in late July, investors pulled out more than $100 billion from money market funds and put much of it into banks, lifting fears that the funds could see a run that resembled the one after Lehman Brothers’ collapse in 2008.

Since the beginning of this year through July 20th, holdings of cash in United States commercial banks surged 85 percent, or $912.7 billion, to $1.98 trillion, according to the Federal Reserve.

In a sign of just how much cash had poured into commercial bank accounts, Bank of New York Mellon said on Thursday that it would charge institutional clients with more than $50 million on deposit a fee of 13 basis points. The move is intended to recover some of the cost of managing the money, but is also a bid to slow the so-called hot money that has been ricocheting between Treasuries, money-market funds and pure cash balances at the big banks.

The Bank of New York Mellon said the fee would only be applied “to a small number of institutional clients with extraordinarily high deposit levels where the deposits have increased significantly in recent weeks, well above market trends.” The bank did not disclose just how much cash had poured into its coffers recently.

Over all, banks took in nearly $200 billion between mid-June and mid-July as institutional investors fled money market accounts and sought the safety of accounts protected by the Federal Deposit Insurance Corporation, according to Joseph Abate, a money market strategist at Barclays Capital.

While its rivals have not yet announced similar moves, the Bank of New York’s charges are likely to force cash out of banks and back into money market funds and Treasuries, driving rates even lower where possible, Mr. Abate said in a note to investors Thursday.

“The movement into deposits during a financial crisis is expensive for U.S. banks because they have to pay deposit insurance on these extra inflows,” Mr. Abate wrote. “These inflows mostly represent ‘hot money.’ ”

There are signs that money market funds are beginning to regain some of their appeal now that the debt ceiling has been raised and as stocks swoon.

Amid the decline on Wall Street and approval of the debt ceiling increase this week, $13.1 billion went back into money market funds on Tuesday and Wednesday, said Peter Crane, the president of Crane Data, which tracks money market mutual fund flows. Data for Thursday was not in yet, but Mr. Crane said he expected this trend to continue in the coming days.

“Bad news for everyone else is good news for money market funds,” he said.

That is certainly why they appeal to Mr. Forester. He has been building up his cash position for weeks, he said, selling shares of past winners like I.B.M. and Honeywell.

The weak growth in gross domestic product in the first half of 2011, a figure released by the government last Friday, only confirmed his doubts, he said. Now, Mr. Forester’s cash position in his $210 million stock fund equals 22 percent of assets, about double the average since he started the fund 11 years ago.

“You do this ahead of time, you don’t do it when the world’s falling apart,” he said. “We’ve seen a lot of this coming.”

Julie Creswell contributed reporting.

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