Looming Interest Rate Cuts and the Cash Market

By Davide Barbuscia

NEW YORK (Reuters) – Looming interest rate cuts may not immediately spur a rush out of cash-like instruments. Analysts at JPMorgan noted that yields on some shorter-dated government bonds could take months to fall below those on longer-term debt.

The closely watched gap between two-year and 10-year Treasury yields turned positive for the first time in about a month on Wednesday, partially reversing an anomaly where shorter-dated government bonds yielded more than longer-dated counterparts.

However, inversions in other parts of the yield curve may persist longer, and investors are unlikely to abandon shorter-dated debt, where yields have been over 5%. JPMorgan fixed income strategists Teresa Ho and Pankaj Vohra highlighted this trend in a note on Wednesday.

For instance, the Treasury yield curve comparing three-month bills to two-year notes is deeply inverted, with the former yielding about 133 basis points more than the two-year paper as of Thursday. Historically, it has taken months for that segment of the yield curve to turn positive after rate cuts begin.

In both 2001 and 2019, which featured aggressive and shallow rate-cutting cycles respectively, the spread turned positive about three months following the first cut.

As liquidity investors tend to seek yield, the implication is that it could take at least three months before cash begins to shift significantly out, irrespective of the upcoming easing cycle’s developments.

So far, there is little evidence that investors are moving away from cash. Assets in U.S. money markets surged to a record $6.24 trillion in August, according to data from the Investment Company Institute.

The JPMorgan analysts remarked, “We wouldn’t be surprised if MMF AUMs (money market funds assets under management) continue to rise into year-end, even if the Fed begins the easing cycle this month.” They added, “Declines in MMF balances will likely be more of a 2025 story.”