A paradoxical phenomenon has recently been observed in international markets: massive amounts of cash are circulating despite the aggressive restrictive monetary policies of central banks.

According to data from the Investment Company Institute, since the beginning of the year, investors have injected $128 billion into US money market mutual funds.

As reported by Bloomberg, at the end of the third quarter, companies had a record amount of $4.4 trillion in cash. Following a barrage of short-term debt issuances surpassing $1 trillion since mid-2023, the market seems poised for even more.

This development is in stark contrast to the question that puzzled Wall Street: where would all this cash be invested when the Federal Reserve began lowering interest rates, making deposits less attractive?

However, much has changed since then. Investors have dramatically deviated from the expected policy easing. The longer the central bank takes to begin reducing its benchmark interest rate, the more cash held in money market funds can earn 4%, 5%, or more, deterring investors from looking elsewhere.

According to Bloomberg's analysis, it must also be added that corporate executives seem hesitant to spend money post-pandemic, and depositors continue to worry about the banking system's state. All signs indicate that 2024 is another big year for cash.

"The year of cash was not just a flash in the pan," commented Peter Crane, President of Crane Data LLC, which monitors the money market fund sector.

Cash was a sidelined option for most of the decade following the financial crisis, as the Fed kept borrowing costs near zero. But this changed after a measured, three-year tightening cycle, and the pandemic triggered a rush for investment havens.

In 2022, the Fed began the most aggressive rate hike pace in decades, sending rates well above 5%. Everyone, from asset managers to small investors, rediscovered the attractiveness of money market funds, treasury bills, and other short-term assets over virtually no gains from bank deposits.

As a result, more than $1 trillion flowed into money funds last year, the most for any year since ICI records began in 2007. These inflows helped the funds keep pace with the increase in securities issuance and the gap between total money market assets and outstanding accounts. This continues to suggest a preference for short-term public debt.

Interest rate hikes have caused short-term securities' yields to skyrocket above those of long-term bonds, with the 3-month Treasury bill currently yielding around 5.37%, over a percentage point higher than the 10-year benchmark bond. While the so-called yield curve inversion warns of a potential economic recession, cash earning significantly more short-term and mutual funds offering similar rates are unlikely to shift so quickly.

Now, with policymakers signaling a shift towards interest rate cuts, the debate begins on how long this volume of cash will last. The timeline of these reductions will play a role, and following strong employment and inflation data this month, investors have downgraded their expectations for any action before mid-year.

At the end of last year, Jeffrey Rosenberg of BlackRock Financial Management stated that he expected a significant portion of the $6 trillion in mutual fund cash assets to be channeled into areas such as stocks, credit, and even further out on the Treasury curve. Citi Global Wealth and UBS Asset Management echoed similar views.

For JPMorgan analysts, only about $500 billion is at risk, as most funds are used for cash management or liquidity purposes.

Moreover, considering stocks against cash, "relative to expected earnings, cash is relatively attractive," wrote Barclays analyst Joseph Abate in a monthly report last week, comparing the expected earnings per share of the S&P 500 with the Fed Funds rate.