Following the Flows
Narratives have been front running markets for much of the last few months heading into this week’s election. While exhausting (or exciting?), we have done our best to stay focused on the data. Following fund flows for much of 2020, we continue to view – with a high probability – that the large allocations to cash will continue moving off the sidelines and into risk assets over the coming months.
Money market funds have now seen 12-consecutive weeks of outflows totaling -$268.1bn. Year-to-date, money market inflows remain at an elevated +$769.46bn. Over that same time period, equities have seen net outflows of -$5.1bn while all fixed income (driven by investment grade credit) has seen inflows of +$102.8bn. The mismatch from flows of $170.4bn implies there is a lot of cash that still needs to find a home. We believe this continued rotation out of cash and into risk assets will provide a strong tailwind to credit spreads, especially in the 5 year and in part of the curve, as we move through the fourth quarter and into 2021.
Source: Bank of America, Wells Fargo Securities, EPFR/Informa Business, Smith Capital Investors
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