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In October 2022, the new "Bond King" Jeffery Gundlach invented the term T-bill and bill to refer to a trading strategy that takes advantage of the high interest rate environment after the Fed's rate hike to easily make profits by investing in U.S. Treasuries. A year ago, Gunndlach was still shouting that buying short-term bonds could enjoy a 5% yield and easily "win without doing anything."

Now, the Federal Reserve is about to cut its policy interest rate, which has been at a high level for more than 20 years. If the warning of interest rate cut comes true, the yield of short-term US bonds will inevitably fall. However, it seems difficult for investors to get rid of their "addiction" to T-bill and bill trading this week, and money funds are still "attracting money" continuously.

Data released last week by the Investment Company Institute, a global fund industry association, showed that as of last Wednesday, August 21, U.S. money market funds had inflows of about $106 billion this month, with total assets reaching a record high of $6.24 trillion. Commentators said that of the $6.24 trillion, about 60% came from companies that have been hoarding cash after the COVID-19 pandemic, and the rest came from retail investors who were satisfied with returns that were barely higher than bank deposits.

The media pointed out that institutions such as Pimco and BlackRock and Wall Street fund managers have repeatedly advised investors to increase their allocation to long-term bonds, because the return on cash will only decline in the future. In an environment of sharply lower interest rates, investing in longer-term debt will also generate good capital gains, and investors in cash equivalents seem very happy to maintain the status quo for the time being. Why is this the case?

According to Kathy Jones, chief fixed income strategist at Charles Schwab, interest rate cuts have been discussed many times before, but the story of the cry of wolf has not come true, so many people may just be waiting for the interest rate cut to actually come. After all, it does not make sense to stick to cash investment. If the yield falls, then it makes little sense to keep more than $6 trillion in money market funds.

Last Friday, Fed Chairman Powell's speech at the Jackson Hole Central Bank Annual Meeting was seen as a full dovish turn. On the same day, some commentators said that his speech dispelled all doubts about the Fed's September rate cut. Although the September rate cut seems to be a foregone conclusion, some analysts predict that the money market may still be attractive to investors. The key lies in the extent of the rate cut.

If it only drops by 1 percentage point, the interest rate on short-term U.S. Treasury bonds will remain around 4%. This return is still attractive, especially considering that interest rates were close to zero for many years before the Fed launched this tightening cycle in 2022, and the yield on long-term U.S. Treasury bonds was always much lower than 4%. This may explain why retail investors are not in a hurry to change their positions.

Even if the Federal Reserve starts cutting interest rates, money market funds will be able to continue to hold at least some of retail investors' cash because such investments can also offer higher returns than keeping money in banks, making them attractive to institutions that outsource cash management services.

John Queen, a portfolio manager at Capital Group, which manages $2.5 trillion in assets, noted that this recent tightening is the first time in recent years that cash actually provides some returns, so he can understand investors' preference for cash. Queen recommends a classic diversification strategy of investing in a combination of cash, stocks and fixed income, regardless of how this classic strategy has worked recently.

Wall Street News mentioned last month that some analysts are worried that once the Fed starts to cut interest rates, the demand for short-term U.S. Treasury bonds by money market funds may decline, pushing up short-term interest rates and causing continued pressure on market funds. Other analysts believe that in order to lock in the high returns brought by the Fed's rate hike, investors have already poured into the money market, and these funds will remain abundant.

Teresa Ho, head of U.S. short rates at JPMorgan Chase, noted:

In the past three interest rate cut cycles, funds did not begin to flow out of money market funds until the Fed entered the second half of the rate cut process. The current yield of 4% to 5% is still quite attractive.