This was supposed to be the year of the exodus from money markets. Wall Street prognosticators said the Federal Reserve’s rate cuts and the ensuing rally in stocks and bonds would all prompt investors to pull cash out of money-market funds.
They couldn’t be more wrong. As rates fell and the stock market soared, companies and households continued to pour cash into money funds, pushing total assets in those accounts past $7 trillion for the first time ever this week.
The continued popularity of these funds, which buy U.S. Treasury bills and other short-term paper, highlights how attractive benchmark interest rates above 5% are to an investor base that has become accustomed to rates near 0% this century.
Even with the benchmark rate now at 4.5%, money market funds continue to provide a steady stream of near-risk-free returns, supporting the finances of many households and offsetting some of the damage done to the rest of the economy by rate hikes.With growing signs that the Federal Reserve may not slash its benchmark rate any further, many on Wall Street now predict that Americans won’t give up their love of cash anytime soon.
“It’s hard for me to see what would drive institutional or retail investors away from money market funds,” said Laurie Brignac, chief investment officer and global head of liquidity at Invesco Ltd. “People thought that once the Fed cut rates, money would rush out.”
Money market rates are not only still near their peaks, but are in line with, and often above, the rates on most alternatives, which is also what attracts investors.
The three-month Treasury bill currently yields about 4.52%, about 0.07 percentage points higher than the 10-year Treasury bond yield. The Fed's overnight reverse repurchase agreement mechanism, where money funds often park cash, currently has an interest rate of 4.55%.
In addition, banks have been quick to pass on the impact of the Federal Reserve's recent interest rate cuts to consumers, making money markets a more attractive place for consumers to stash cash.
Goldman Sachs Group Inc.’s Marcus, a consumer bank, has cut the interest rate on its high-yield savings accounts to 4.1% following the Federal Reserve’s rate hike, while rival Ally Bank is currently offering a 4% rate.
Money funds attracted about $91 billion in the week ended Wednesday, bringing total assets to $7.01 trillion, according to Crane Data, a money market and mutual fund information company.
The Crane 100 Money Fund Index, which tracks the 100 largest funds, had a seven-day return of 4.51% as of Nov. 13.
“Despite the rate cuts, money market rates remain attractive, there is a lot of uncertainty about the future direction of the economy and the yield curve remains relatively flat,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “Yields would have to fall significantly for inflows to slow. Historically, only when yields fall to 2% or lower will inflows into money market funds slow or result in outright outflows.”
That contrasts with forecasts from firms such as BlackRock Financial Management, which said in December it expected a large portion of money fund assets to flow into stocks, credit and other sectors.
Apollo Global Management has also said in recent months that Federal Reserve rate cuts and a steeper yield curve could prompt households to move their cash elsewhere. While that hasn’t happened yet, most market watchers now say they expect demand for money funds to taper by 2025.
Historically, the sector tends to start seeing outflows about six months after the Federal Reserve begins a rate-cutting cycle, according to JPMorgan Chase & Co.
Trump’s victory in the election earlier this month is likely to spur a boom in mergers and acquisitions as the new administration’s antitrust stance is seen as less harsh, prompting more companies to use their stagnant cash.
“I don’t think we’re at a turning point, but we’re approaching a peak of $7 trillion, and looking ahead to next year, it’s hard to see a repeat of 2024,” said Teresa Ho, head of U.S. short-term rates strategy at JPMorgan Chase & Co.
However, Ho said some of the drivers of money fund asset growth will not change. Companies have significantly more cash on hand than before the pandemic. In addition, when interest rates fall, corporate treasurers tend to outsource cash management to reap the benefits rather than handle it themselves, which helps buffer money fund outflows.
Institutional investors account for about half of the $700 billion in money-fund inflows this year, according to Crane data, which tracks the entire money-market industry. Year-to-date inflows were $702 billion in the week ended Nov. 13, bringing total assets to a record $6.67 trillion, according to weekly data from the Investment Company Institute.
“Retail investors have been accustomed to zero returns for decades, so anything above zero looks like a win,” Invesco’s Brignac said. “But there will still be cash flow.”
Article forwarded from: Jinshi Data