By Davide Barbuscia
NEW YORK (Reuters) – Looming rate cuts may not immediately trigger a run on liquidity-like instruments, as it could take months for yields on some shorter-term government bonds to fall below those on longer-term debt, analysts at JPMorgan said.
The closely watched spread between yields on two- and 10-year government bonds turned positive for the first time in about a month on Wednesday, ending an anomaly where shorter-term government bonds yielded more than longer-term government bonds.
But so-called inversions in other parts of the yield curve could last longer, and investors are unlikely to quickly pull out of shorter-dated debt, which has yielded as much as 5%, Teresa Ho and Pankaj Vohra, fixed-income strategists at JPMorgan, wrote in a note on Wednesday.
For example, the part of the U.S. Treasury yield curve that compares three-month bonds to two-year bonds is sharply inverted, with the shorter-term bonds yielding about 133 basis points more than the two-year bonds on Thursday.
Analysts say in the past it took months for that part of the yield curve to turn positive after rate cuts began.
In 2001 and 2019, respectively aggressive and shallow cycles of rate cuts, the spread turned positive about three months after the first cut.
“Given that liquidity investors tend to be yield investors, it could take at least three months for money to actually start flowing, regardless of how the coming easing cycle plays out,” the analysts wrote.
So far, there is little evidence that investors are dumping their money. Assets in U.S. money markets rose to a record $6.24 trillion in August, according to data from the Investment Company Institute.
“We would not be surprised to see MMF AUMs (money market funds assets under management) continue to rise through the end of the year, even as the Fed begins its easing cycle this month,” the JPMorgan analysts said. “Declines in MMF balances are likely to be more of a 2025 story.”
(Reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Alison Williams)
