Cash is making its way back onto the list of attractive holdings for money managers and institutional investors as rates increase and returns improve.
A number of money managers said they have seen recent flows that show cash has become a more popular asset class.
The latest BofA Merrill Lynch Global Research report, published Dec. 18, showed the average cash balance has ticked up slightly to 4.8%; the average balance had been 4.7% in the previous month.
And cash yields across different markets also have improved. U.S. 90-day Treasury bills yielded 2.37% as of Dec. 21, after ending 2017 at 1.32%. U.K. three-month gilts were 0.73% as of Dec. 21, up from 0.4% at the end of 2017.
Italian three-month buoni ordinari del Tesoro bills — known as BoTs — were yielding -0.14% as of Dec. 21, compared to -0.61% in 2017."We've definitely seen the trend of cash being more of an active decision rather than a passive decision in addition to people viewing it as an asset class again," said Kathleen Hughes, global head of the liquidity solutions client business at Goldman Sachs Asset Management in London.
She said there are multiple drivers for this interest, which depend on the currency and type of investor.
For some clients, "very low or negative interest rates have galvanized them to take a more proactive approach to their cash as opposed to a passive sweep into an investment option that may not offer the best risk-adjusted return for them. On the other end of the spectrum, with rising rates in (U.S. dollar terms), we see some clients getting more proactive to take advantage of higher returns that are maybe available in money market funds and ultra-short duration products as compared to overnight bank deposits."
Ms. Hughes said another factor is increased volatility in equities and the perception that the bull market in bonds is over.
"We also see some (investors) moving into cash from other asset classes or shortening their fixed-income exposure by switching to short-duration or ultra-short-duration strategies," she said.