MW Why record cash in money-market funds won't necessarily flood into stocks, bonds

By Christine Idzelis

J.P. Morgan analysts estimated how much of the record cash in money markets is at 'flight risk'

The U.S. stock market broadly fell Thursday, with the S&P 500's financial sector seeing sharp losses.

Investors keep adding to a mountain of cash in money-market funds - and it's not about to flood into riskier assets in the stock and bond markets, despite the Federal Reserve recently resuming its interest-rate-cutting cycle, according to research from J.P. Morgan.

Cash in money-market funds has risen to a record $7.6 trillion after strong inflows in 2025 and will probably keep rising by year-end, analysts at J.P. Morgan said in note this week. They estimated that only about $800 billion of that is susceptible to "flight risk" and it's "primarily retail cash," or money-market assets tied to individual investors.

"Actual movement will depend on interest rates, market conditions and investor preferences," they wrote. Their estimate of assets that might leave money-market funds is partly based on the amount of mainly retail cash that rushed into them as the Fed raised rates, the note showed.

J.P. MORGAN

The Fed's monetary policy is now heading in a different direction, with the central bank last month reducing its benchmark rate as it resumed its cutting cycle. Money-market funds are getting renewed attention as "the Fed prepares for another round of rate cuts," the J.P. Morgan analysts said, as it means investors may earn less on cash parked in such funds and might think about allocating assets elsewhere.

Some investors anticipate that the cash on the sidelines in money markets could help fuel the bull market in U.S. stocks.

But this year's "persistent demand" for money-market funds could pick up during the fourth quarter and "easily push" balances toward $7.7 trillion or higher by the end of 2025, according to the J.P. Morgan note. Investors may be worried about stretched valuations in the U.S. stock market, while rates from money-market funds may look relatively attractive - at least for now.

"Even as the Fed begins to cut rates, the yield spread between cash and bonds is expected to remain relatively flat throughout next year, providing little incentive to extend duration" in the fixed-income market, the J.P. Morgan analysts wrote. "Unless rates fall meaningfully below 3%," cash balances in money-market funds are "unlikely to shift significantly in the near term."

The market's expectations for where the federal-funds rate will ultimately land in the Fed's current cutting cycle has "fluctuated between 2.85% and 4.19% this year," with a recent reading on the terminal fed-funds rate at 2.98%, according to the note.

"Meanwhile, equity markets continue to reach record highs, raising concerns about potential overvaluation," the analysts said. The U.S. stock market was trading lower Thursday, but the S&P 500 SPX remains not far off its record closing peak booked on Oct. 8.

Cash management

Most of the assets in money-market funds are held by institutional investors for "liquidity and cash-management purposes, making large reallocations into equities or longer-duration fixed income less likely," according to the J.P. Morgan note.

"Demographic trends, particularly as they relate to the aging U.S. population, also favor holding more cash," the analysts said. The "substantial cash" held in money-market funds "does not necessarily imply an imminent rotation into riskier assets," they added, noting that levels don't appear unprecedented as a percentage of gross domestic product or commercial bank deposits.

In J.P. Morgan's analysis of mainly retail cash that may rotate out of money-market funds, the analysts said they also considered inflows relating to the regional-bank crisis in 2023.

Based on their estimate, the roughly $800 billion at "flight risk" links back to the cash that was moving into money-market funds when the Fed was raising rates to battle high inflation, "minus some of the inflows that occurred in 2023 following the regional-banking crisis as investors sought diversification away from deposit." The Fed last hiked rates in July 2023.

On Thursday, investors weren't exactly eager for risk-taking in the U.S. stock market, with regional banks in focus as shares of Zions Bancorp $(ZION)$ plunged amid worries about credit losses.

The SPDR S&P Regional Banking ETF KRE, an exchange-traded fund that tracks an index of U.S. regional-bank stocks, slumped 6.2% Thursday, according to FactSet data. The ETF finished the trading session with a much bigger drop than the S&P 500, which fell 0.6%.

In the bond market, Treasury yields fell Thursday. The rate on the 10-year Treasury note BX:TMUBMUSD10Y declined 6.8 basis points to 3.976%, according to Dow Jones Market Data. The policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y dropped 7.8 basis points to 3.426%. Bond yields and prices move in opposite directions.

Many investors are anticipating that the Fed will continue cutting rates this year and into 2026.

Fed-funds futures on Thursday indicated a high probability that the Fed will lower its benchmark rate by 25 basis points at each of its two remaining policy meetings in 2025, which would leave it at a target range of 3.5% to 3.75% by year-end, according to the CME FedWatch Tool, at last check. The Fed will hold its next policy meeting in late October.

"Retail investors tend to be more sensitive to interest-rate changes," as seen with the significant inflows into money-market funds over the past three years, the J.P. Morgan analysts said. "Nevertheless, we do not believe retail investors are currently overallocated to cash to the extent that a substantial rotation into other assets is necessary."

-Christine Idzelis

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October 16, 2025 17:43 ET (21:43 GMT)

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