What to do with all that cash coming off the sidelines? Strategists have suggestions
More than $1.2 trillion flowed into money market funds last year, a veritable tidal wave of cash crashing on the sidelines. So what’s going to happen to all that moolah when – and if – the Federal Reserve starts cutting interest rates?
Well, for fixed-income investors, it most likely means they are going to be reinvesting those dollars at lower yields. That’s why Dhruv Nagrath, director of fixed-income strategy at BlackRock, has been talking to clients about adding some duration to their portfolios to try and capture some potential price appreciation further out the yield curve.
“This is really the sweet spot of when you make your money in bonds, is between the last Fed hike and the first cut,” Nagrath said. “We’re kind of targeting the five-year part of the yield curve.”
Nagrath says bond ETFs are the most efficient vehicle for investors looking to move out of money markets, given their tax efficiency. Of course, that may be expected considering that global bond ETFs pulled in about 300 billion inflows last year, with BlackRock’s iShares funds grabbing $113 billion of that total.
Nagrath says those flows have primarily been into higher-quality bonds like Treasuries and high-grade corporates as investors get comfortable with the new interest-rate environment.
On the equity side, Jeff Schulze, head of economic and market strategy at ClearBridge Investments, believes the so-called Magnificent Seven technology stocks are a crowded trade, with a lot of embedded expectations in those stocks. As a result, he sees any money moving back in from the sidelines going into small-cap stocks should a soft landing materialize.
“We do think that it’s going to be a really good environment for active managers,” he said.
As to when the
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