Torsten Slok, chief economist at Apollo Global Management, believes that as the Federal Reserve continually lowers interest rates, the incentive for investors to shift cash into high-yield assets will increase, and the trend of continuous inflows into money market funds may reverse.
On Tuesday, Slok wrote in a note to clients, 'Now that the Federal Reserve is cutting interest rates, where will the additional $2 trillion in money market accounts flow?' He cited the funds that have flowed into money market funds since the Federal Reserve began raising rates in March 2022. He noted that the Fed's rate hikes injected $2 trillion into money market accounts between March 2022 and September 2024.
Slok said that now the Federal Reserve has begun to cut interest rates, this capital is likely to flow out of these accounts and into higher-yielding assets. However, this rotation may not necessarily favor stocks, and may instead lead to funds flowing into the credit market. He said, 'The most likely scenario is that this capital will leave money market accounts and flow into higher yield assets, such as credit, including investment-grade private credit.'
Earlier this year, Slok warned of similar capital outflows, and even after a continuous influx of investors, he maintained his view. In an earlier report, Slok stated that the credit market seems prepared for further capital inflows after the election. He said, 'We expect credit fundamentals to remain strong. This situation, combined with higher total yields and a steep yield curve, should continue to attract capital into the credit space, thereby supporting valuations.'
However, even though the Federal Reserve has lowered rates in the last two meetings, funds have continued to flow into money market funds, which may reflect that such funds tend to reduce distributions to investors more slowly than banks. Last week, the assets of money market funds swelled to $7 trillion for the first time, dispelling speculation that once the Fed started to cut rates from their highest levels in over 20 years, investors would withdraw cash.
As of November 18, the seven-day yield of the Crane 100 Money Fund Index, which tracks the 100 largest funds, was 4.46%, slightly below the lower bound of the federal funds rate.
Slok's prediction may disappoint stock bulls, as they hope that the outflow of funds from money market funds will drive a new round of rebounds in the stock market.
Meanwhile, Goldman Sachs recently stated that due to the Federal Reserve's easing policy and a strong economy supporting a favorable late-cycle environment for risk, investors should still prefer stocks over bonds. Analysts said in a report last month, 'In a late-cycle context, stocks can provide attractive returns driven by earnings growth and valuation expansion, while total returns on credit are often constrained by narrowing credit spreads and rising yields.'
Article reposted from: Jin Shi Data
