Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.
14 April 2023
The savings slumber
Depositors are beginning to wake from their slumber, causing ripple effects across financial markets.
Fundamentals
Bank depositors have been asleep for nearly 15 years. The onset of quantitative easing and negative interest rate policy dragged down interest rates on savings accounts, turning cash into a dormant asset class. In the US, the current rate hiking cycle initially did little to change this dynamic, with rates on savings accounts remaining well anchored. However, by exposing the growing opportunity cost of low deposit rates, the recent banking crisis has awoken savers from their slumber. In March, USD 340 billion flowed into money market funds, the highest monthly inflow since the onset of the Covid pandemic in March 2020 (source: EPFR). The challenge for policymakers is that these money market fund inflows are being plowed back into the Federal Reserve’s (the Fed’s) overnight reverse repo facility, a trend that is likely to intensify as we head into the debt ceiling showdown. Ultimately, by depriving banks of the deposits that support loan creation and halting the extension of credit to the real economy, the move into money market funds does little to help stimulate economic growth. Indeed, credit conditions tightened markedly in March as banks reassessed the terms on which they are willing to lend to US businesses.
US credit conditions are tightening
Source: National Federation of Independent Business, US Federal Reserve, Bloomberg, J.P. Morgan Asset Management. Data as of March 31, 2023
Quantitative valuations
A restriction in credit to the real economy could bring the Fed’s rate hiking cycle to an abrupt end. The market pricing of the pathway for the fed funds rate has shifted markedly in the last few weeks. Investors now anticipate that the Fed will pause shortly, and could even begin cutting rates as soon as September. The possibility of a pause, or even a cut, in the fed funds rate by the end of the year has helped lift equity and bond market valuations, which have remained buoyant in the last month despite turbulence in the banking system. The timing of a recession also remains highly uncertain as investors weigh the impact of tightening credit conditions against the benefits of a pivot in Fed policy.
Technicals
Inflows into select fixed income markets continued in March. Notably, investment grade credit saw inflows return, suggesting investors still have some appetite for risk despite the concerns raised by the banking crisis. The attractiveness of fixed income has also been enhanced by the return of “right way” correlation, whereby falls in the price of riskier assets are offset by gains in safer government bonds. While the timing of a recession may remain uncertain, the possibility that bonds may be offering investors diversification benefits again, alongside higher yields, should continue to be supportive of inflows in the near term.
What does this mean for investors?
As depositors move away from low interest rate bank accounts, the ripple effects could further dampen credit creation in the real economy and possibly force the Fed to pivot. While it is always challenging to predict the exact timing of the coming recession, investors should continue to be mindful of the attractive valuations on offer in select areas of the fixed income market, as well as the return of “right way” correlation, which could offer some protection at this late stage in the cycle.
About the Bond Bulletin
Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.
Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.
Fundamental factors
include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings and leverage metrics)
Quantitative valuations
is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors)
Technical factors
are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum
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