Every act of creation is first an act of destruction. - Pablo Picasso
Every act of creation is first an act of destruction.
U.S. money market fund assets have climbed to nearly $7.4 trillion, equal to about 23% of nominal gross domestic product (GDP). That rivals the peaks reached after the Global Financial Crisis. There has been no forced deleveraging or faith shaken in risk assets – only the aftermath of post-GFC policy experiments now unwinding, and incentives slowly normalizing. After a decade of zero interest rates, quantitative easing (QE), pandemic-era stimulus and now the return of positive real yields, liquidity has found a comfortable home. The financial system resembles a vast parking lot – capital is not fleeing risk but idling in yield-bearing form, earning more in safety than it once did in motion.
The road to this moment began with financial repression. After the GFC, zero-rate policy compressed returns and discouraged holding cash. Investors moved outward on the risk curve, taking on duration and credit risk in search of yield. That cycle reversed after the COVID-19 shock. Fiscal transfers and further QE swelled the cash balances of households and institutions. When inflation rose and the Federal Reserve tightened, liquidity shifted to the front end, where short-term instruments finally offered yield.
For the first time in nearly two decades, cash carries a positive real yield – meaning short-term rates now exceed inflation. That single fact explains much of today’s behavior. Liquidity has become an active allocation. Investors are earning while waiting, collecting income without taking interest-rate risk. Cash is competitive again after years of policy extremes and volatility. The appeal of liquidity is not a sign of disengagement but of deliberate allocation.
How long that stance lasts depends less on investor psychology than on policy. If real yields turn negative again, the incentive to stay parked could fade quickly. Recent policy signals suggest that change might be near. A more dovish Fed chair next year could continue to ease monetary policy and bring the return of negative real rates. Should that happen, the yield advantage keeping liquidity at the front end could erode, encouraging capital toward duration or riskier assets.
Liquidity cycles turn when the incentive to move changes. For now, front-end yields reward patience, inflation expectations are steady, and investors see little reason to re-risk. If holding cash stops paying, trillions could begin to move – toward duration, credit or equities. That steady reserve of liquidity has helped anchor yields and compress risk premia, keeping credit spreads tighter than fundamentals might otherwise justify. The scale of that liquidity ensures it will play a role in the next phase of markets.
The persistence of parked cash is the quiet signature of this cycle: a system adjusting to the reappearance – and possible retreat – of real yield. Liquidity reflects both caution and contentment – a patient participation shaped by long policy aftereffects rather than a retreat from risk.
The Great Parking Lot might not last forever, but for now, it captures a world content to wait and earn.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
