Higher yields on cash have allowed some de-risking.
Every accounting student starts by learning some simple rules: Assets equal liabilities plus equity, and every liability must have an offsetting asset. Before long, we start to see the tradeoffs everywhere, in our household finances and beyond. A new vehicle is an asset, but it’s offset with a new loan or a reduction in cash. A mortgage is a major liability, but the value of the underlying home is also significant.
The high interest rate environment has brought a lot of focus on liabilities. Borrowing costs are higher, which hinders economic activity. Major purchases like homes and vehicles become more expensive. Businesses seeking to expand will find debt financing to be more costly and difficult to procure. Indebted nations will find their fiscal balance even further strained by higher interest obligations.
But the other side of the interest rate ledger has been somewhat overlooked. Households are earning significantly more on deposits; banks are raising their offered rates and are competing against each other for deposits in a way that had been unnecessary during a period of easy money.
Deposits are not savers’ only option, of course. Money market funds have seen balance inflows for more than a year now, with extra impetus in the wake of the failure of Silicon Valley Bank. With their access to the Federal Reserve’s overnight reverse repo facility, money market funds can comfortably offer annualized returns over 5%, in a safe and liquid vehicle.