In the first half of August, nearly $90 billion surged into U.S. money market funds as investors sought to lock in yields ahead of expected Federal Reserve interest rate cuts. According to EPFR, net inflows into these funds reached $88.2 billion between August 1 and August 15, marking the highest monthly figure since November of the previous year.
Most of the recent inflows came from institutional investors rather than retail clients, reflecting a strategic positioning in anticipation of the Fed’s potential rate reduction from the current 5.25 to 5.5 percent as early as next month. Typically, yields on Treasury bills decline both before and after rate cuts, but money market funds, with their diversified holdings, can offer more stable returns over a longer period.
Shelly Antoniewicz, deputy chief economist at The Investment Company Institute, noted, “The institutional increase that we’ve seen has really only just been the last couple of weeks. The reason for that is it’s pretty clear now that there is a much greater chance that the Fed will ease in September.”
This influx highlights money market funds’ continued appeal as a safe haven for investors amidst a volatile market environment. Despite a robust 2023 for these funds, characterized by a record $1.2 trillion in net inflows driven largely by retail investors, institutional interest is now becoming prominent.
Deborah Cunningham, chief investment officer of global liquidity markets at Federated Hermes, explained, “As those direct securities’ yields have ratcheted down with expectations of further Fed rate cuts, investors would rather keep the yield of a money-market fund for a longer period.”
Money market funds, permitted a weighted average maturity of up to 60 days, can invest in a range of short-term securities, thus offering relatively stable yields. Currently, the average U.S. money market fund yields 5.1 percent, compared to slightly higher yields from one-month and three-month Treasury bills.
Despite ongoing inflows, there are signs that retail investors are beginning to shift towards riskier assets such as equities. Yet, the substantial inflows in August suggest increasing institutional interest in these funds as companies seek both liquidity and yield.
Market participants anticipate a gradual rather than abrupt reduction in rates, which would result in a slow decline in money fund yields. While fears of an imminent recession have eased, the Fed is expected to implement cuts cautiously, potentially allowing money market funds to maintain their attractiveness longer than in previous rate cut cycles.
John Tobin, chief investment officer at Dreyfus, highlighted that the current economic conditions differ from past financial crises, suggesting that money market funds are well-positioned to attract and retain assets. Cunningham added that yields above 3 percent are crucial for maintaining investor interest in these funds. “If you start dipping below 3 percent, that’s when people start getting a bit itchy about it and going into other products,” she said.
Related topics: