Although cash remains an attractive safe-haven asset for investors, BlackRock has already seen some early signs...
BlackRock's Chief Financial Officer said on Tuesday that even if the Federal Reserve cuts rates "moderately", investors are expected to increase their allocation to stocks and bonds while reducing cash holdings.
Earlier this year, there were expectations that the Federal Reserve would significantly cut rates after hiking to combat inflation, but in recent months, these expectations have moderated, as the U.S. economy continues to show growth despite high borrowing costs.
BlackRock's CFO Martin Small said on Tuesday at the Goldman Sachs U.S. Financial Services Conference, "I believe that even moderate rate cuts will drive investors to a significant degree of risk reallocation."
Lower rates are expected to eventually bring money market yields down from the current level of over 4%, with yields on cash-like instruments, such as treasury bills, currently at this level.
However, so far, there is little evidence that investors are abandoning cash. Data from the Investment Company Institute shows that as of last week, assets in U.S. money markets stood at $6.77 trillion, up from $6.3 trillion at the beginning of September.
Small stated, "Global political and economic uncertainties persist, and cash remains an attractive safe-haven asset for clients."
He stated, "Market expectations for Federal Reserve rate cuts are... shallower and fewer, and these factors along with others have made money market fund balances more sticky."
The Federal Reserve began cutting rates by 50 basis points in September. It then cut rates again by 25 basis points last month, and investors are currently betting that the central bank will cut rates again by 25 basis points later this month. Further easing will largely depend on economic data and the inflation path.
Investors currently expect the federal funds rate to be around 3.7% by the end of next year, which is about 90 basis points higher than the expectations from September.
Despite this, Small noted that cash-preferred investors are underperforming compared to traditional portfolios that mix stocks and bonds. He stated, "This fear of missing out on opportunities... is significantly driving risk reallocation."
He also added that BlackRock's fixed income products, such as bond exchange-traded funds, have seen strong inflows this year. He said, "This is not a flood of money coming in... but we are indeed seeing more funds entering fixed income for normal allocations."