Why high returns for cash are here to stay, these strategists say

By Steve Goldstein

Critical information for the U.S. trading day

The Treasury on Wednesday is due to make its quarterly refunding announcement, its sometimes market-moving plan on how to finance its needs for what will be $243 billion this quarter.

While this particular announcement is not likely to be a blockbuster, the growing attention on it does highlight the aggressive borrowing by the U.S. Treasury to finance the nearly $2 trillion per year budget deficit.

Barclays every year produces what it calls the Equity Gilt study, which tabulates returns for assets adjusted for inflation. The latest scorecard - over the last 98 years, U.S. stocks have returned 6.7% per year, outperforming the 2.1% return from government bonds and the 0.3% return from cash.

The U.K. bank also provides a barrage of interesting investment commentary accompanying this data, and the latest edition focused on the rapid and what it called profound changes in the world of fixed income. A report from its U.S. rates team led by Anshul Pradhan says the worsening fiscal profile should affect several key assumptions underpinning the fixed income markets.

Among their conclusions - high returns for cash are here to stay.

That's a function not just of the massive deficits that neither major political party wants to tackle, but a low personal savings rate and the need for major green energy-related investments. "Hence, in the context of structurally wide deficits, the steady state nominal policy rate could be 3.5% assuming 2% inflation. If inflation settles at a higher level - at say 2.5% - the steady state nominal rate would be 4%," they say. The Fed, by contrast, expects the longer-run federal funds rate to range from 2.5% to 3.1%.

The Barclays analysts also note a smaller tolerance by authorities to accept recessions. "While there is a possibility that policymakers could feel constrained in using fiscal policy to the extent needed in the next downturn given the fiscal profile, the same argument could have been made during COVID as debt projections were equally bleak but fiscal measures were still deployed," they say. So that means not just that the neutral rate is higher, but also the through-the-cycle average won't be as far below the neutral rate.

Furthermore, the demand base is moving from price insensitive buyers - think the Fed executing monetary policy or banks meeting domestic capital requirements - to sensitive ones, like hedge funds. That means there will be a headwind for Treasury valuations going forward.

And now we get to the T-bill and chill discussion. "Barring a downturn that creates attractive prospects for total returns in owning government funds, it is unclear why investors would buy 10y Treasuries at 4.6% when 3m T-bills are yielding 5.3%. Even if the Fed cuts to, say, 3.5% over the medium term, history suggests that a healthy term premium would be demanded over the expected returning in rolling T-bills, keeping long-end Treasuries elevated," they say.

A worrying fiscal profile also has implications for the role of bonds in a broad multi-asset portfolio. While high inflation is usually blamed for the falling correlation between equity prices and Treasury yields, a world in which investors are worried about the fiscal profile is "unlikely to be kind to [U.S. Treasurys'] role as a diversifier," they say.

The markets

U.S. stock futures (ES00) (NQ00) were already negative but extended losses after a hotter-than-expected employment cost index reading. The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 4 basis points.

The buzz

The key corporate earnings are due after the close, when Amazon.com (AMZN), Advanced Micro Devices (AMD) and the up-753% over 52 weeks Super Micro Computer (SMCI) report results.

Blue-chip names reporting ahead of the open include 3M (MMM), which surged after beating profit forecasts, and McDonald's (MCD), which slumped after missing earnings estimates.

Tesla shares (TSLA) slipped 2% after its 15% surge on Monday, when China was reported to have approved full self-driving.

Chegg (CHGG) and Coursera (COUR) are two education-tech companies whose stock slumped on weak guidance.

The chief executive of banking giant HSBC (HSBC) surprised analysts by saying he will retire after five years on the job.

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Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   AMZN    Amazon.com 
   NIO     Nio 
   AAPL    Apple 
   MULN    Mullen Automotive 
   GME     GameStop 
   AMD     Advanced Micro Devices 
   AMC     AMC Entertainment 
   SMCI    Super Micro Computer 

The chart

HSBC also examined the higher-for-longer scenario, but this time from a corporate perspective. This chart shows estimated forward 12-month revenue for the S&P 500 - note the inflection in the trend rate. "So why shouldn't interest rates remain at high levels and be cut only gradually? If nominal growth, revenues, margins, and other metrics remain so strong, higher rates don't pose an immediate threat to the economy. They are merely a reflection of strong fundamentals," they say.

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-Steve Goldstein

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04-30-24 0913ET

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