Can cash be a “bubble”?

I don’t think so. But if cash bubbles were a thing, we’d be staring at one.

US money market funds took in another $37 billion in the week to September 4, according to the latest ICI update published on Thursday evening. It was the fifth straight weekly inflow, and the largest since early last month.

The total haul over that five-week stretch comes to $165.08 billion, a huge sum which pushed total AUM to a new record north of $6.3 trillion.

As the figure shows, the inflows are inexorable. Redemptions are few, far between and with the exception of weeks around key tax dates, invariably small.

Over the latest weekly reporting period, government funds saw almost $14 billion of inflows from retail investors and $23 billion of institutional money. Most observers expect the latter to keep coming in, at least for the balance of the year.

Although the Fed’s set to lower rates, cash will remain a very attractive asset for the foreseeable future barring deep cuts. And because deep Fed cuts are typically associated with acute macro or market trauma, cash would likely be “bid” in that instance too as investors flee to safety.

It’s hard to overstate the appeal. Cash is a de facto ATM put, now with positive inflation-adjusted carry. Of course, there’s an opportunity cost when equities are tacking on huge gains, but that’s a bit misleading. Recall that money fund inflows picked up momentum in the wake of last year’s regional banking drama as spooked depositors became aware of the fact that an FDIC guarantee is no different than the guarantee on a T-bill or a repo with the Fed: Either way, it’s the full and faith credit of the US government, and when you’re in a government money fund, you’ll generally get more yield. If some of the cash parked in money funds represents deposit substitution, that’s not money that was ever going into riskier assets in the first place.

Between the magnetism of high yields for retail money and ongoing inflows from corporates, the mountain just keeps getting larger. YTD, MMF inflows now stand at $413.76 billion. Since the beginning of 2023 — i.e., measuring to capture the above-mentioned inflows that followed the SVB drama — that figure is $1.57 trillion.

It’s worth noting that inflows to money funds haven’t exactly precluded inflows to equities in 2024.

Massive inflows to US equity-focused ETFs have more than outstripped outflows from long-only mutual funds, leaving a net $234 billion of inflows for the year so far.

Some strategists still believe a meaningful portion of the $6.3 trillion MMF AUM is theoretically available for deployment in IG credit and, eventually, stocks. But short-end specialists seem to doubt it.

“We are skeptical money market fund investors would be willing to shift from a risk-free and intraday liquid investment vehicle into much riskier assets simply because of Fed rate cuts,” BofA’s Mark Cabana remarked this week.