Nearly $90 billion flowed into U.S. money market funds in the first half of August, as investors sought to secure attractive yields ahead of an anticipated interest rate cut by the Federal Reserve next month.
Money market funds, which invest in cash and short-term assets like government debt, attracted net inflows of $88.2 billion between August 1 and August 15, according to data from EPFR. This marks the highest inflows for the first half of a month since November of last year.
The majority of these inflows came from institutional investors—large entities managing funds on behalf of others—rather than retail investors, the data revealed.
Industry experts suggest that this surge reflects institutional investors’ efforts to position themselves ahead of a possible rate cut, which could lower the current rates of 5.25% to 5.5% as early as next month. While yields on Treasury bills typically fall before and after a rate cut, money market funds may offer more stable rates due to their diversified holdings.
This influx of funds highlights the continued competition between money market funds, equities, and short-term bonds as safe havens for investors’ cash.
Last year, money market funds experienced a record year, with net inflows reaching $1.2 trillion as interest rates hit a 23-year high to combat inflation. While retail investors initially drove this trend, institutional investors are now following suit.
U.S. money market funds are allowed to maintain a weighted average maturity of up to 60 days, enabling them to hold a range of securities, from debt maturing in three to six months to shorter-term assets.
Currently, the average U.S. money market fund yields 5.1%, according to Crane Data, while a one-month Treasury bill offers a slightly higher 5.3% and a three-month bill yields 5.2%. The overnight lending rate is at 5.32%.
However, Antoniewicz cautioned that yields on direct securities, like overnight commercial paper and certificates of deposit, could quickly drop if or when the Fed begins to ease rates.
While inflows into money market funds have continued this year, they have slowed as interest rates have stabilised. Some fund managers and strategists noted that retail investors are beginning to explore riskier asset classes, such as equities. Nonetheless, the strong inflows in August suggest that institutional money is still flowing into these funds, as large corporations seeking yield on their cash also need ready access to capital.
Market participants also expect that the Fed’s rate cuts will be gradual rather than steep, causing money fund yields to decline slowly over time.
Weak U.S. jobs data earlier this month sparked fears of an impending recession. While stronger economic data has eased those concerns, markets are still pricing in nearly a full percentage point of cuts by the end of the year.
However, John Tobin, chief investment officer at Dreyfus, pointed out 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.” This time, he added, “assuming that’s not the case, we’re now talking about terminal rates with at least a 3 [per cent] handle.”
This suggests that money market funds could continue to attract assets even after the Fed begins cutting rates. “Money funds are better positioned,” Tobin said.
Still, the ability of money market funds to sustain inflows depends on the durability of the U.S. economy, which would allow the Fed to gently lower borrowing costs.
Cunningham noted that rates above 3% are seen as a “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,” she said.