World's total amount of cash is on the rise!

India's economy expanded at a brisk 7.4% in the last quarter, demonstrating strong underlying momentum.Following the announcement, the Sensex, one of India's main stock indices, rose by nearly 1%, with banking stocks leading the charge.This positive market reaction is understandable: cheaper credit translates to increased spending by consumers and businesses alike, fostering higher economic growth.Moreover, lower interest rates will reduce mortgage costs, benefiting homebuyers within India's expanding middle class.

Given this context, the limited absorption of this liquidity by US Treasuries warrants closer examination.Firstly, the bond market has endured a challenging bear market in recent years, fostering a cautious sentiment among investors regarding re-entry.Secondly, there has been a noticeable pullback from the US market, partly due to lingering uncertainties surrounding White House policies.This sentiment has contributed to a roughly 10% weakening of the US dollar against major currencies since the beginning of the year.

However, a recent breakthrough offers a glimmer of stability. Following extensive negotiations in London, US and Chinese officials have established a framework for implementing a trade deal previously announced.While awaiting presidential approval from both nations, this development represents a tangible step towards resolving trade disputes that have weighed heavily on market sentiment.

Central banks globally have injected unprecedented amounts of money into the financial system, leading to record levels of global liquidity. This surge in money supply naturally seeks avenues for deployment.While traditional assets like equities have maintained their value and gold has seen significant appreciation, one major asset class has surprisingly not absorbed this influx of capital: long-dated US Treasury bonds.Let's explore the reasons behind this divergence and what it means for investors.

Introduction

The M2 money supply can be conceptualized as the economy's readily available spending power.It encompasses physical currency in circulation, funds held in savings accounts, and other highly liquid deposits that can be quickly converted into cash.Central banks often manipulate the M2 money supply as a tool to stimulate economic activity; by increasing it, they effectively inject more cash into circulation, aiming to encourage spending and investment.

Finance Education: Understanding M2 Money Supply

In a move aimed at stimulating economic activity, the Reserve Bank of India (RBI) recently implemented a larger-than-expected half-percentage-point cut in its key interest rate.Complementing this, the RBI also reduced the 'cash reserve ratio' – the proportion of deposits that retail banks must hold in reserve – by a full percentage point.This significant adjustment is expected to free up billions of rupees for banks to lend, thereby boosting liquidity in the Indian financial system.These decisive cuts are designed to sustain India's robust economic growth, closer to the country's 8% target.

In Other News: India's Proactive Monetary Easing

The Global Liquidity Index (GLI), which aggregates central bank balance sheets and the M2 money supply (explained in detail below), serves as a key indicator of the total cash circulating within the global economy.This index is currently on an upward trajectory, signaling an abundance of available capital.Generally, increased liquidity tends to flow into assets offering attractive yields.

Following the Capital Trail

Despite recent trends, US Treasuries remain among the world's most liquid assets. Furthermore, current yields are at historically high levels, offering investors more attractive income than in recent memory.Investing in US Treasuries also provides a valuable avenue for diversifying currency exposure. The dollar's recent dip has not diminished its fundamental role as the world's primary reserve currency.Therefore, beyond the appealing yields, investors are also positioning themselves for potential upside when market sentiment eventually shifts.

Key Takeaways for Investors

Curious where record global cash is flowing? This article unpacks why US Treasuries aren't soaking it up and what it means for your investments—from yields to diversification. Dive in!

World's total amount of cash is on the rise!

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