(Bloomberg) - Cash may still be king for the moment, but after more than $1 trillion flowed into money-market funds last year as short-term rates rose, investors are trying to figure out where it goes next.
Bank of America Corp. projects a record $500 billion of flows to high-grade corporate debt in 2024, based on the current pace of inflows. Barclays Plc strategists expect $400 billion to $600 billion could move into risk assets from money-market funds over the next year, with investors likely to favor credit over equities in that shift.
Investors have been reaping the benefits of duration — bond parlance for price sensitivity to changes in interest rates — for much of the last four months, amid bets that central banks will cut interest rates aggressively in 2024.
Since the end of October, long-dated debt in a corporate-bond index has seen gains amounting to almost four times that of short-dated paper, according to Bloomberg indexes. That’s a reversal of what was going on during rate hikes in 2022, when longer-dated bonds slumped in value.
While bets on rate cuts have been moderating since the start of the year — with long bonds losing some ground compared to shorter notes — a rotation is seen as likely in the longer term.
“Many clients are still short fixed income and institutional investors are underweight duration,” said Karsten Rosenkilde, a portfolio manager at DWS Group. There’s talk of trillions of euros still sitting in money-market funds, Rosenkilde said. That means there’s room for some of this cash to rotate into credit.
For Nicholas Elfner, co-head of research at Breckinridge Capital Advisors, investment-grade corporate bonds are attractive, and he thinks the asset class may draw larger allocations from institutions like pension funds and insurance companies this year.
“A tactical rotation out of money-market funds by some portion of holders into short and intermediate-term bond funds seems plausible to us,” Elfner said.
Annuities — an insurance product that consumers use to help fund their retirements — are another source of potential demand for credit. Sales of annuities reached an all-time record high of $385 billion last year, up 23% from the year before. Money raised by annuities often goes toward investment-grade debt.
Signs of renewed appetite for credit this year are already showing up in flows data. US-domiciled high-grade and junk-bond funds have drawn a combined $32.4 billion so far in 2024, while their Europe-domiciled counterparts — excluding exchange-traded funds — have garnered $31.5 billion, according to EPFR Global data compiled by BofA Securities strategists.
Those flows into credit didn’t generally come from money-market funds, according to Joost de Graaf, co-head of the credit team at Van Lanschot Kempen Investment Management. Instead, “it was likely from previous allocations to government bonds, equities or just new money that has been put to work in credit,” he said.
Still, these big inflows have shielded corporate-bond prices from risks related to the timing of rate cuts, as shown when US inflation figures came in hotter than expected last week.
But with policy-easing expectations being dialed back, investors may be cautious about moving money too rapidly out of the estimated $6 trillion sitting in cash.
Eric Vanraes, head of fixed income at Eric Sturdza Investments, says investors are “still a bit reluctant” to switch from money-market funds, saying that the first rate cut from a major central bank could do the trick.
With money markets and low-duration bonds “you are happy with a good yield but you miss the bull market,” Vanraes said. Before the end of October, it “was a pretty good strategy, but now, I would prefer active duration management.”
By Tasos Vossos
With assistance from Caleb Mutua
