Cash May Remain Appealing for Months Despite Rate Cuts, JP Morgan Reports

By Davide Barbuscia

NEW YORK – Anticipated interest rate cuts may not lead to an immediate exodus from cash-like instruments, as analysts at JPMorgan indicate that yields on certain shorter-dated government bonds might take months to dip below those of longer-term securities.

The gap between two-year and 10-year Treasury yields turned positive for the first time in about a month on Wednesday. This marks a partial reversal of a situation where shorter-dated government bonds were yielding more than their longer-dated counterparts.

However, inversions in other areas of the yield curve could persist longer, and investors are unlikely to flee from shorter-dated debt, which currently offers yields exceeding 5%, according to JPMorgan fixed income strategists Teresa Ho and Pankaj Vohra.

For example, the yield curve segment comparing three-month bills to two-year notes remains heavily inverted, with the shorter-dated securities yielding approximately 133 basis points more than the two-year notes.

Historically, it has taken several months for that segment of the yield curve to become positive following the initiation of rate cuts, the analysts noted. In both 2001 and 2019, which featured aggressive and moderate rate-cutting cycles respectively, the spread turned positive roughly three months after the first cut.

JPMorgan analysts suggest, "As liquidity investors typically favor yield, this indicates it may require at least three months before cash flows begin to shift significantly, irrespective of how the upcoming easing cycle unfolds."

So far, there has been little indication that investors are moving away from cash. Assets in U.S. money market funds reached a record $6.24 trillion in August, according to data from the Investment Company Institute.

The JPMorgan analysts added, "We wouldn’t be surprised if the assets under management in money market funds continue to rise towards year-end, even if the Federal Reserve initiates the easing cycle this month. Any decline in money market fund balances will likely be a story for 2025."