Where is Cash Being Invested?

Early in the year I reported to Retirement Watch readers that cash balances were extremely high. Many people and businesses made moves late in 2012 to avoid higher taxes they suspected could take effect in 2013. The moves generated a lot of cash from asset sales, special dividends, and the like. Money market funds and other liquid accounts were only parking places for that money. It needed to go to work elsewhere.

One place money went was the stock market, as shown by the sharp rise in U.S. stock indexes in the first two months of 2013. But the money also is moving into short-term bond funds and similar vehicles, says Sober Look. One impetus for this move is the prospect of new money market fund regulations that requires the value of shares to float instead of being fixed at $1.00. If you’re going to take the risk of a short-term bond fund, why not invest in the real deal and earn a higher yield?

What’s causing this decline? The common explanation has been a major rotation into equities. That certainly explains some of it, but there is more to the story. Some institutional investors are becoming uneasy about the impending money market funds regulation. Not only are investors paid a near zero rate on their money market holdings, they also may be subject to some NAV fluctuations in the near future. Furthermore, the NAV fluctuations may only be applied to funds holding commercial paper and not to those holding just treasury bills or treasury repo.