(Bloomberg) — It was supposed to be the year of the great money market exodus.
Between the Federal Reserve's interest rate cuts and the rally in stocks and bonds that would naturally follow, all the elements were there, Wall Street forecasters said, to prompt investors to pull money out of money market funds en masse.
They were wild outside. Because as the rate cut came and stocks rose, companies and households continued to pour money into money funds, pushing up the total assets held in those accounts. over 7 trillion dollars this week for the first time ever. The relentless rush into those funds — which buy Treasuries and other short-dated instruments — underscores how attractive prime rates above 5% have been for an investor base accustomed to them being closer to 0% this century.
Although those rates now drop to 4.5%, money market funds are still providing a steady stream of nearly risk-free income that is strengthening the finances of many households and compensation to some extent the damage that rate hikes have caused in other parts of the economy. And with growing signs that the Fed may not cut key rates any further, many on Wall Street are now predicting that Americans won't be falling out of love with money anytime soon.
“I'm struggling to see what will drive institutional or retail investors away from money market funds,” said Laurie Brignac, chief investment officer and head of global liquidity at Invesco Ltd. “People thought that when the Fed was going to taper the rate money was going to come out fast.”
It's not just the fact that money market rates are still near their peak, but the fact that they are in line with, and often still above, what most alternatives are paying that continues to attract investors.
The 3-month Treasury bill currently yields about 4.52%, about 0.07 percentage point higher than the 10-year Treasury rate. The Fed's overnight reverse repo facility, a place where money funds often park their money, currently pays 4.55%.
Additionally, banks have been quick to pass on the effects of recent Fed cuts to consumers, making the money markets a more attractive place for them to store their money.
Goldman Sachs Group Inc.'s consumer bank Marcus has cut the rate on its high-yield savings account to 4.1% following the Fed's moves, while competitor Ally Bank currently offers 4%.
That helped money funds attract about $91 billion in the week through Wednesday, according to Crane Data, a money market and mutual fund information firm, pushing total assets to $7.01 trillion. The seven-day return for the Crane 100 Money Fund Index, which tracks the 100 largest funds, was 4.51% as of Nov. 13.
Money market rates “remain attractive despite rate cuts, there is considerable uncertainty about the path of the economy going forward, and the yield curve is still relatively flat,” said Gennadiy Goldberg, head of interest rate strategy. of the US at TD Securities. “Yields will have to fall significantly for inflows to slow down. Historically it took yields falling to 2% or lower to slow money market inflows or lead to outright outflows.”
Read more about the US Money Market Industry:
US Money Market Fund assets exceed $7 trillion for the first time
Money market funds remain in vogue even as reforms take effect
'T-Bill and Chill' is a hard habit for investors to break
A $6 trillion wall of money is holding strong as the Fed delays cuts
It stands in stark contrast to forecasts from BlackRock Financial Management, which in December said it was expected a large portion of money fund assets to be decamped to places like equities, loans and even further up the Treasury curve.
Apollo Global Management Inc. has also said in recent months that Fed tapering and a steeper curve are likely to prompt households to move their money elsewhere.
While that hasn't happened yet, most market watchers now say they expect money funds to see less demand in 2025.
The industry, for one, historically tends to start experiencing outflows roughly six months after the Fed begins a rate-cutting cycle, according to JPMorgan Chase & Co.
Then there's the possibility that Donald Trump's election victory earlier this month will spur one boom in merger and acquisition activity given the incoming administration's perceived softer antitrust stance, prompting more corporations to release cash they have parked.
“I don't think we're at a tipping point, per se, but we're getting to the point where $7 trillion is probably peaking, and as we think about next year, it's going to be hard to see another repeat of 2024.” , said Teresa Ho, head of US short rate strategy at JPMorgan.
However, Ho says, some drivers of money fund asset growth are unlikely to change.
Companies are holding significantly more cash than before the pandemic, for one. Additionally, corporate treasurers tend to outsource cash management as rates fall to capture yields, rather than fighting it themselves, helping to hedge against any cash outflows.
Institutional investors have accounted for roughly half of the $700 billion in money fund inflows this year, according to data from Crane, which tracks the entire money market industry. Data from the Investment Company Institute, which is released on a weekly basis and excludes the firms' own cash funds, put year-to-date inflows at $702 billion and total assets at a record $6.67 trillion in the week to on November 13.
“Retail investors have been used to getting paid zero for decades, so anything north of that looks like a win,” Invesco's Brignac said. Still, “there will be money moving,” she added.