European Bonds: Will Cash Stay King as Rates Reverse?

Investors who stay too long in cash may find they’ve missed out.

A challenging economic backdrop combined with historically high cash yields has driven many investors to favor low-risk, liquid assets such as money market funds (Display).

Euro Investors’ Dash for Cash

Now we believe the balance of risks for euro investors is changing. If you’re among the many investors sitting on the sidelines, now’s the time to get in on the action. Here’s why.

With euro-area inflation easing, rate cuts will likely drive bond prices higher and cash yields lower. Investors bold enough to lock into fixed-income investments now will continue to earn current high income levels and may enjoy capital gains too.

Our analysis—based on a longer US data history—shows that assets tend to flow out of money market funds when the central bank starts to ease monetary policy. On that basis, we believe that euro money-market flows will likely soon reverse as assets are redirected to bond markets. Considering the very large sums involved, the impact on bond prices could be substantial.