These funds as of the end of November held at least 7.9 percent of their money in cash equivalents, according to the Investment Company Institute. Fridson deems this estimate to be "understated," given his argument that high-yield bonds which are past their call date but yielding higher than market levels should be considered cash, since they are likely to soon turn into cash.
"Some of these bonds might have five years left until maturity but the company will almost certainly redeem them," he said.
In addition, Fridson thinks that when the figures come out, the first two weeks of 2001 will almost certainly exhibit a reversal of the mutual fund outflow trend for high-yield bonds.
What to Wait For
But the recovery is far from being a done deal.
Fridson, as well as market participants and analysts from both Moody's and Standard & Poor's, expect further rate cuts by the Fed. And the cuts must happen at regular Federal Open Market Committee meetings for them to prove reassuring to investors.
"The [Jan. 3] rate cut, occurring between meetings and being larger than the usual 25 basis points, gave rise to all sorts of speculation concerning the reasoning behind it, including the situation of California's electric utilities, Fridson notes.
An even more unsettling aspect of the surprise Fed rate cut, he adds, has been the widespread perception that "maybe the economic numbers that the Fed has and [the numbers] we don't [have] are worse than we thought."
In addition, a letup in the current climate of economic uncertainty is needed in order to restore the proper shape of the yield curve. The slope of the Treasury curve from 90 days to 10 years is currently negative, meaning that an investor can get a greater yield on a three-month bill than on a 10-year note.
While this downward slope has amounted to as much as 40 or 50 basis points in recent weeks, don't expect any significant progress until a 10-year Treasury yields about 100 basis points higher than a 90-day instrument.
Says Fridson, "This is one of the leading indicators of the economy."
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