Individuals and institutions have poured tens of billions of dollars into money market funds in the aftermath of last year's violent response to last year's equity losses and short-term bonds.
The current turmoil caused by trade tensions between China and the United States, internal conflicts in Washington and interest rate hikes by the Federal Reserve also inspired the cash rush.
Despite these concerns, Wall Street has made a strong comeback for the start of the New Year. The S & P 500 had its best month since January 2015, while speculative bonds had their best monthly return in more than seven years.
At the same time, the returns of money-market funds full of all this safe haven have diminished.
Analysts and fund managers said the cash rush was understandable, but security had a high opportunity cost.
"Investors can be punished, money market funds offer security, but they accept a cost because they accept a lower return," said Jerome Schneider, head of short-term portfolio management at PIMCO in Newport Beach, California.
The attractiveness of money market funds has exploded: the shares of FAANG (Facebook Inc., Amazon.com, Apple Inc., Netflix Inc. and Alphabet Inc., parent company of Google) have exploded with the rest stock market, while speculative bonds plunged into the red in the final weeks of 2018.
The American treasures were successful thanks to the end-of-year safe haven rally. Previously, the Fed's four rate hikes in 2018 had weighed on the bond market.
That left money.
Interest rates on cash investments, which are currently around 2%, do not dazzle much. But over the past year, they surpassed the inflation rate for the first time since the financial crisis and remained virtually zero three years ago, even before the Fed increased its rates.
Monetary funds reached nearly $ 3.03 billion in early January, their highest level since March 2010, and remain close to that level, according to data firm iMoneyNet.
"I like cash now.You can get a very reasonable return," said James Sarni, Senior Portfolio Manager at Payden & Rygel in Los Angeles.
Nevertheless, the price to pay for playing safely has never been more obvious than in January, when it became clear that the Fed was laying the groundwork for a break after its old tightening cycle three years. Last week, he pledged to be "patient" before continuing to raise rates.
Anticipating this turning point, the S & P 500 rose 7.9% in January, nearly 6 percentage points higher than the average return money fund, while speculative bonds generated a return of 4%. 6%.
"I'm afraid investors with long-term horizons will not hurt," said Kristina Hooper, Global Markets Strategist at Invesco in New York.
Risk-averse investors could use cash to create floating-rate, short-term bond funds to boost returns without significantly increasing their risk profile, analysts said. Short-term bond fund returns averaged around 2.7%, while floating rate funds averaged 2.4%.
These funds can lose money if interest rates rise further. But investors who remain on the sidelines have already underperformed the large recovery of riskier assets up to now in 2019.
"They tend to stay cautious for too long," said Schneider of PIMCO.
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