Cash stopped being a waiting room

For most of the last fifteen years, cash was the thing you held while deciding what to do. It paid nothing, so holding it had a cost that grew the longer you waited. That arithmetic has reversed, and the balances show it.

Money market funds are at record size. The industry body that publishes weekly totals for money market fund assets has recorded successive highs, with balances measured in trillions rather than billions and inflows continuing well into this year.

The composition matters as much as the total. Government funds, which hold Treasury bills and repo rather than corporate paper, account for the large majority of assets, which means the growth is a flight to the safest available instrument rather than a reach for yield.

That distinction separates this from a speculative episode. Nobody is taking risk to earn this return. They are declining to take risk and being paid for it, which is a genuinely unusual position for an investor to be in.

The effect on banks is the part that gets least attention and matters most structurally. A deposit that moves into a money fund leaves the banking system's balance sheet, and the bank has to replace that funding at a market rate rather than the rate it was paying the depositor.

That process has a name in bank treasury departments and it is not affectionate. Cash sorting describes depositors gradually moving idle balances to something that pays, and it raises funding costs at exactly the institutions least able to absorb the increase.

For asset allocators the question is different and harder. A cash position paying a real return after inflation removes the pressure to be invested, which is the pressure that drove a decade of moving further out the risk curve to find a return at all.

The uncomfortable corollary is that this is a rate story, not a strategy. If short rates fall, the same balances that arrived for the yield have no reason to stay, and the money that left deposits for funds can leave funds for something else just as easily.

That is why the record total is a weaker signal than it looks. It measures the current attractiveness of a short instrument rather than a durable change in how investors think about cash.

What may prove durable is the operational habit. Treasurers and individuals who built the plumbing to move idle balances into a fund automatically have installed something that keeps working after the yield advantage narrows.

That plumbing is the lasting part of the episode. Rates will move and the balances will follow, but the default behaviour of leaving money idle in a current account has been broken for a large number of people who will not go back to it.