Money-market funds are yielding about 4.8%. Longer-duration bonds offer a bit more, with more risks.
Investors have heard plenty of warnings this year about wearing out their welcome in cash.
Yet right now, with markets on edge with the U.S. election in two weeks, it looks unlikely that investors with some $6.5 trillion parked in cash in money-market funds, earning roughly 4.8%, will feel compelled to suddenly change course.
Strong U.S. economic data since September has been forcing a repricing in the bond market as investors adjust lower their expectations for Federal Reserve interest rate cuts in the months ahead.
Markets recently also have been bracing for a potential victory for former President Donald Trump in November, which could put his tariff and tax-cut proposals into motion.
"Those things are all bearish for interest rates," said Hong Mu, a portfolio manager at Penn Mutual Asset Management, in a phone interview Wednesday. "That's why we are seeing rates going higher in the recent couple of weeks."
Read: Trump tariffs: These states would be hit hardest by proposed import taxes
When investors make decisions about asset allocations, it usually comes down to relative value, Mu said. But with investment-grade corporate bonds yielding at bit more than 5% and the 10-year Treasury yield BX:TMUBMUSD10Yat 4.25%, he said it's boils down to: Does it make sense to move out of money-market funds?
When looking at taking on incrementally more risk and yields on offer, "that's just a difficult question to answer," Mu said.
Given uncertainty around the election, including the fiscal expansion proposals of either presidential candidate, Mu said it might be "good to wait things out before making those kinds of decisions."
Furthermore, if the past can be a guide, investors aren't likely to move significant amounts of cash out of money-market fund until the Fed already has dramatically cut interest rates.
While the Fed lowered rates by 50 basis points in September, its short-term rate remains historically high in the 4.75% to 5% range. The Fed's latest projections penciled in a 3.25% to 3.5% range by the end of next year.
Mu said the Fed likely would need to cut rates below 1% to spur significant money-market outflows, a level that likely would coincide with fears of a recession.
Another potential catalyst for outflows might be longer-duration bond yields climbing "much, much higher from now," due to fiscal concerns or another big inflation scare, he said.
Read next: Money-market funds shed $6.5 billion in assets. No, the flood out of cash isn't here.
Stocks were down from recent record highs as Treasury yields climbed, with the Dow Jones Industrial Average DJIA off 1.3% on Wednesday, the S&P 500 index SPX 1.4% lower and the Nasdaq Composite Index COMP off 2.1%, according to FactSet.
-Joy Wiltermuth
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