By Davide Barbuscia
NEW YORK (Reuters) – Looming interest rate cuts may not immediately spur a rush out of cash-like instruments, as yields on some shorter-dated government bonds could take months to fall below those on longer-term debt, analysts at JPMorgan said.
The closely watched gap between two-year and 10-year Treasury yields turned positive for the first time in about a month on Wednesday, partially reversing an anomaly during which shorter-dated government bonds yielded more than their longer-dated counterparts.
But so-called inversions in other parts of the yield curve could last longer and investors are unlikely to rush out of shorter-dated debt, where they have been enjoying yields as high as over 5%, JPMorgan fixed income strategists Teresa Ho and Pankaj Vohra wrote in a note on Wednesday.
For instance, the part of the Treasury yield curve comparing three-month bills to two-year notes, is deeply inverted, with the shorter-dated securities yielding about 133 basis points more than the two-year paper on Thursday.
Historically, it took months for that part of the yield curve to turn positive after rate cuts began, the analysts said.
In 2001 and 2019 – an aggressive and shallow rate-cutting cycle, respectively – the spread turned positive about three months after the first cut.
“As liquidity investors tend to be yield investors, this implies that it could take at least three months before cash meaningfully begins to shift out, regardless of how the upcoming easing cycle unfolds,” the analysts wrote.
So far there has been little evidence that investors are abandoning cash. Assets in U.S. money markets surged to a record $6.24 trillion in August, data from the Investment Company Institute showed.
“We wouldn’t be surprised if MMF AUMs (money market funds assets under management) continue to rise into year-end, even if the Fed begins the easing cycle this month,” the JPMorgan analysts said. “Declines in MMF balances will likely be more of a 2025 story.”
