Investors' cash buildup comes at a cost
* U.S. money fund assets break above $3 trillion - iMoneyNet
* Wall Street, junk bonds rack up huge gains in January
* Short-term bond funds seen as alternatives to money funds
By Richard Leong
NEW YORK, Feb 11 (Reuters) - Investors sitting on a mountain
of cash built up since late last year may be paying a price for
playing it too safe in the first weeks of 2019.
Individuals and institutions have poured tens of billions of
dollars into money market funds amid the aftershock of last
year's punishing losses from stocks and next-to-nothing from
bonds. Ongoing turmoil from trade tensions between China and the
United States, political infighting in Washington and interest
rate increases from the Federal Reserve have also inspired the
rush into cash.
Despite those concerns, Wall Street has staged a comeback to
kick off the new year, with the S&P 500 recording its
best month since 2015 in January, while junk bonds produced
their strongest monthly return in more than seven years.
At same time, the yields on money funds stuffed with all
that safe-haven cash have trickled lower.
Analysts and fund managers said the stampede into cash is
understandable, but safety comes with a steep opportunity cost.
"Investors can penalize themselves. While money market funds
offer safety, they come at a cost as they accept a lower yield,"
said Jerome Schneider, head of short-term portfolio management
at PIMCO in Newport Beach, California.
Money market funds' appeal skyrocketed as high-flying FAANG
shares (Facebook Inc, Amazon.com, Apple Inc
, Netflix Inc and Google's parent Alphabet Inc
) took a spill with the rest of the stock market, and
junk bonds sank deep into the red in the last weeks of 2018.
U.S. Treasuries eked out slim gains courtesy of the year-end
safe-haven rally. Before then, the Fed's four rate increases in
2018 had been a drag on the bond market.
That left cash.
Interest rates on cash investments, currently at around 2
percent, are hardly dazzling. But in the last year they have
risen above the rate of inflation for the first time since the
financial crisis, and are up from near zero over three years ago
before the Fed began raising rates.
Money fund assets crested at nearly $3.03 trillion in the
beginning of January, their highest level since March 2010, and
they remain close to that level, according to data firm
"I like cash now. You can earn a very reasonable return on
cash," said James Sarni, senior portfolio manager at Payden &
Rygel in Los Angeles.
Still, the price of playing it safe was never more evident
than in January, when it became clear that the Fed was setting
the stage for a hiatus from its three-year-old tightening cycle.
Last week it pledged to be "patient" before lifting rates
Anticipating that dovish turn, the S&P 500 posted a 7.9
percent increase in January, nearly 6 percentage points above
the average yielding money fund, while junk bonds racked up a
4.6 percent return.
"I worry those investors who have long-term horizons may be
hurting themselves," said Kristina Hooper, global market
strategist at Invesco in New York.
Risk-averse investors could shift some cash into short-term
and floating-rate bond funds to pick up extra yields without
extensively lifting their risk profile, analysts said. Yields on
short-term bond funds are averaging about 2.7 percent, while
those on floating-rate funds are averaging 2.4 percent.
Such funds can lose money if interest rates rise further.
But investors sticking to the sidelines are already
underperforming the big rally in riskier assets so far in 2019.
"They tend to play it safe for too long," PIMCO's Schneider
(Reporting by Richard Leong
Editing by Dan Burns and Tom Brown)
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