According to a recent report by State Street Global Markets, long-term institutional investors have opted to hold more cash in their portfolios in September due to heightened volatility in the Treasury market, which has led to a significant selloff in stocks and bonds.
Traditionally, investors would allocate a larger portion of their portfolios to stocks and a smaller portion to bonds, following a 60/40 portfolio construction. However, the State Street report reveals that investors are increasingly keeping a substantial amount of cash on hand.
In September, cash allocations rose by 0.3% to reach 20.4%, while fixed-income allocations increased by 0.2% to reach 28.5%. On the other hand, equities experienced a decline of 0.5% and now account for 51.1% of investor portfolios.
According to Michael Metcalfe, head of macro strategy at State Street, investors are seeking refuge in cash due to the weakness in both the equity and fixed income markets. While cash holdings are currently above average, Metcalfe cautions that they are still a few percentage points below their usual peak during times of crisis.
State Street’s report provides insights into the allocation of investor portfolios between equity, fixed income, and cash since 1998.
The recent spike in short-term Treasury yields, following the Federal Reserve’s decision to increase its policy rate to a 22-year high, has presented ordinary investors with an opportunity to earn 5% on Treasury bills (T-bills) for the first time in over a decade. However, longer-dated Treasury yields, such as the 10-year and 30-year rates, lagged behind in approaching the 5% level. This sudden repricing has put pressure on older bonds with lower coupons.
The impact of this shift has been evident in the stock market as well. On Friday, the Dow Jones Industrial Average (DJIA) gained approximately 400 points or 1.2%. Meanwhile, the S&P 500 index (SPX) rose by 1.5%, and the Nasdaq Composite Index (COMP) increased by 1.8%, according to FactSet data.
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