Insights   •   Cash

Market Forecast: Three Factors to Watch

Portfolio Strategist

The second half of 2021 could prove both dull and exciting, depending on a variety of factors: debt ceiling resolution, a taper tantrum, money fund regulation, and crypto or stable coins. In the first half of the year, we saw continued growth in cash holdings. With those cash increases, came challenges of excessive balances presenting to both banks and money market funds. The Federal Reserve’s (Fed) Quantitative Easing purchase program continues to add approximately $120 billion of new reserves (cash) each month and the money markets have reached a point of saturation that could pose a problem. How is too much cash a problem? Banks can no longer store funds for their clients due to swelling balance sheets and the impact of required regulatory capital and liquidity ratios. Some of this cash has flowed into money market funds and other short-term debt investments causing certain rates to reach zero and negative yields. As investors continue to seek returns above zero, they reach out on the duration curve and down the credit curve. This additional risk could pose a challenge should rates become more volatile.