Data shows investors running toward safety of cash as stock market stumbles, yields rise

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Investors poured $68.1 billion into cash funds in the week to Wednesday as concerns over additional Federal Reserve rate hikes continue to rattle financial markets, according to figures from Bank of America, Goldman Sachs and TD Securities, all citing EPFR data in their weekly notes. 

Cash is “as good as bonds and stocks” until the bear market comes to an end with an “expected credit event,” said Michael Hartnett, chief investment strategist at Bank of America Global Research. 

See: The secret to stocks’ success so far in 2023? An unexpected $1 trillion liquidity boost by central banks.

Meanwhile, equities funds were hit by outflows of $7.4 billion, driven by outflows from U.S. stocks, which recorded a drawdown of $10.6 billion in the past four weeks, according to EPFR data.

U.S. stocks were off to a surprisingly good start in 2023, but the upside momentum fizzled in February after a flurry of higher-than-expected inflation data and Fed officials’ remarks implied interest rates may have to go higher than previously thought. The three major U.S. indexes ended a rough February in the red earlier this week. 

The indexes, however, rebounded for solid weekly gains in the second half of the week. The S&P 500 was on pace to book a weekly advance of 1.9% on Friday, while the Dow Jones Industrial Average rose 1.7% and the Nasdaq Composite gained 2.5% for the week, according to Dow Jones Market Data.

Meanwhile, bond funds witnessed their ninth straight week of inflows totaling $8.4 billion, said EPFR data.

On Tuesday, Treasury yields notched their biggest monthly gain in months with the yield of the policy-sensitive 2-year Treasury note advancing 58.8 basis points in February, while the 10-year rate rose 38.7 basis points. Both of them booked the largest one-month gains since September, according to Dow Jones Market Data. 

Rising Treasury yields can make stocks less appealing because they allow investors to park money in instruments that now earn an attractive return.

Hartnett of BofA Global Research said the yield of the 10-year Treasury note will trade below 4% level only after a “hard landing” for the economy, which refers to an economic slowdown or downturn following a period of rapid growth, tames inflation. The yield on the 10-year Treasury slipped below 4% on Friday, falling to 3.970% from 4.072% in the previous session. 

See: Inflation has yet to peak in most G-10 countries and ‘we are waiting for a proper market reality check’: BofA

Meanwhile, investment grade bonds saw inflows for 10 consecutive weeks at $7.2 billion, the longest streak since October, while noninvestment grade high-yield bonds suffered the largest three weeks of outflows since September, according to EPFR data.

“Flows into global fixed income funds accelerated on stronger inflows into government bond funds and investment grade credit, which had seen more mixed flows in recent weeks,” said Isabella Rosenberg, a FX analyst at Goldman Sachs, in a Friday note. “Flows into aggregate type funds slowed, but remained elevated. Inflation protected bond fund flows have continued to be negative.”

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