Bank of America analysts revealed that a new bubble has formed due to the recent banking sector crisis, which has caused the collapse of 3 regional banks in the United States so far.
“Money market funds are the (new hot assets) right now,” analysts said in a recent note, noting that assets under management exceeded $5.1 trillion, up more than $300 billion over the past four weeks.
Analysts monitored the largest weekly shift to liquidity since March 2020, the largest ever inflow into Treasury bonds over a period of 6 weeks, and the largest weekly outflow of investment-grade bonds since October 2022.
The most recent rise in money market fund assets was in 2008 and 2020, when the Federal Reserve cut interest rates.
Analysts said: "Markets stop panicking when central banks start to panic, and that historically, there has been a surge in borrowing through the Fed's emergency discount window with the stock market dropping significantly."
They stated that there is one difference this time, which is that inflation is a reality and that the labor markets in the major industrial countries are still exceptionally strong.
They added that history testifies to the selling of stocks with interest hikes, and that when banks borrow from the Federal Reserve, they tighten lending standards, which leads to reducing it, and this limits the optimism of small companies and ultimately to the emergence of cracks in the labor market.
Okaz (Washington) @okaz_online