Almost $90bn poured into US money market funds in the first half of August, as investors sought to lock in attractive yields that could outlast an expected interest rate cut by the Federal Reserve next month.
Money market funds, which hold cash and short-dated assets including government debt, pulled in net inflows of $88.2bn between August 1 and August 15, according to flow tracker EPFR — the highest figures for the first half of a month since November last year.
Most of the inflows originated with institutional investors — large entities investing on behalf of others — rather than retail investors, the data shows.
Industry participants said the rush of money reflected institutional investors positioning for a fall interest rates from the current level of 5.25-5.5 per cent from as soon as next month.
Yields on Treasury bills typically decline ahead of an expected interest rate cut, and drop further immediately after rates go down, they added, but money market funds can offer higher rates for longer because they have more diversified holdings.
“The institutional increase that we’ve seen has really only just been the last couple of weeks,” said Shelly Antoniewicz, deputy chief economist at The Investment Company Institute. “The reason for that is it’s pretty clear now that there is a much greater chance that the Fed will ease in September.”
The inflows into money market funds so far this month highlight how the vehicles are still competing with shares and short-dated bonds as a haven for investors’ cash.
Money markets funds had a blowout 2023 as rates rose to a 23-year high to combat inflation. Net inflows reached a record $1.2tn last year, according to EPFR data, helped by significant demand from retail investors. Industry participants say institutional investors are following suit.
“This is something that happens quite regularly when interest rates start to go down,” said Deborah Cunningham, chief investment officer of global liquidity markets at Federated Hermes. “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 of time.”
US money market funds are allowed a so-called weighted average maturity of up to 60 days, meaning they can hold a diverse range of securities — from debt maturing in three or six months’ time to much shorter-dated assets.
The average US money market fund currently yields 5.1 per cent, according to Crane Data. By comparison, a one-month T-bill yields a slightly higher 5.3 per cent and a three-month bill 5.2 per cent. Sofr, the overnight lending rate, is 5.32 per cent.
However, “it’s the direct securities, like overnight commercial paper, overnight certificates of deposit . . . [that] are going to instantaneously change if or when the Fed starts to ease,” said Antoniewicz, referring to an anticipated decline in yields on short-dated assets traded directly in the market.
While the inflows have continued this year, they have slowed as interest rates have stabilised. Money fund managers and strategists say there are already signs of retail investors branching out into riskier asset classes such as equities.
However, they noted that August’s inflows were an early sign of more institutional money flowing into the asset, as big companies that need ready access to capital for operations also seek a yield on their cash.
“If you are a cash manager for a large institutional corporate that has a substantial amount of cash in the market, 10 basis points, 20 basis points can make a huge difference, even if it’s only for a month,” said Cunningham.
Market participants also said that they expected the Fed’s rate cuts to be gradual rather than rapid and deep, which would mean money fund yields drift lower over an extended period of time.
Weak US jobs data at the start of the month sparked fears of an imminent recession. More robust economic data has soothed those concerns, but markets are still pricing in just under one full percentage point of cuts by the end of the year.
However, John Tobin, chief investment officer at Dreyfus, noted that “every rate cut in recent history has been a function of lowering rates to get to zero because there’s been a financial crisis.” By contrast, he said, “here, assuming that’s not the case, we’re now talking about terminal rates with at least a 3 [per cent] handle.”
That implied that money market funds could continue to attract assets long after the Fed cuts rates. This time, “money funds are better positioned”, he said.
Still, industry participants accept that money market funds’ ability to attract persistent inflows relies on the durability of the US economy allowing the Fed to gently cut the cost of borrowing.
Cunningham described rates above 3 per cent as “the magic hurdle”. “If you start dipping below 3 per cent, that’s when people start getting a bit itchy about it and going into other products.”
https://www.ft.com/content/6e8935e3-c1cf-4a53-9be5-fe7b3b55a394
