It was supposed to be the year of the great money-market exodus.
Between Federal Reserve interest-rate cuts and the rally in stocks and bonds that would naturally follow, all the elements were there, Wall Street prognosticators said, to prompt investors to yank cash out of money-market funds en masse.
They were wildly off. For while the rate cuts came and stocks soared, companies and households have kept shoving cash into money funds, pushing the total assets held in those accounts above US$7 trillion ($9.41 trillion) this week for the first time ever. The relentless rush into those funds — which buy Treasury bills and other short-dated instruments — underscores just how attractive benchmark rates above 5% have been for an investor base that had grown accustomed to them being closer to 0% this century.
Even as those rates now slide to 4.5%, money-market funds are still throwing off a steady stream of nearly risk-free revenue that is bolstering the finances of many households and offsetting to some extent the damage that rate hikes have caused in other parts of the economy. And with signs mounting that the Fed may not cut benchmark rates much more, many on Wall Street are now predicting that Americans aren’t going to fall out of love with cash any time soon.
“I’m struggling to see what is going to get either institutional or retail investors out of money market funds,” said Laurie Brignac, chief investment officer and head of global liquidity at Invesco Ltd. “People thought when the Fed was going to lower rates money was going to rush out.”
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It’s not just that money-market rates are still near their peak, but also the fact that they’re in-line and often still above what most alternatives are paying that’s continuing to attract investors.
Three-month Treasury bills currently yield around 4.52%, about 0.07 percentage points more than the rate on the 10-year Treasury note. The Fed’s overnight reverse repurchase agreement facility, a place money funds often park their cash, currently pays 4.55%.
What’s more, banks have been quick to pass the effects of the Fed’s recent cuts onto consumers, making money markets a more appealing place for them to stash their cash.
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Goldman Sachs Group Inc.’s consumer bank, Marcus, has reduced 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 lure about US$91 billion in the week through Wednesday, according to Crane Data, a money-market and mutual fund information firm, pushing total assets to US$7.01 trillion. The seven-day yield on 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 significant uncertainty about the path of the economy going forward, and the yield curve is still relatively flat,” said Gennadiy Goldberg, head of US interest-rate strategy at TD Securities. “Yields would have to fall significantly for inflows to slow. Historically it took yields falling to 2% or lower to slow money market fund inflows or lead to outright outflows.”
It stands in stark contrast to predictions from the likes of BlackRock Financial Management, which in December said it expected a large chunk of money-fund assets to decamp for places like equities, credit and even further out the Treasury curve.
Apollo Global Management Inc. has also in recent months said that Fed cuts and a steeper curve would likely prompt households to shift their cash elsewhere.
While it hasn’t happened yet, most market watchers now say they expect money funds to see less demand in 2025.
The industry, for one, has historically tended to begin experiencing outflows roughly six months after the Fed begins a rate-cutting cycle, according to JPMorgan Chase & Co.
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Then there’s the potential for Donald Trump’s election victory earlier this month to spur a boom in merger and acquisition activity given the incoming administration’s perceived softer antitrust stance, driving more corporations to deploy cash they’ve been parking.
“I don’t think we’re at a turning point, per se, but we’re getting to the point where US$7 trillion is maybe approaching its peak and as we think ahead to next year, it’ll be hard to see another repeat of 2024,” said Teresa Ho, head of US short-rate strategy at JPMorgan.
Still, says Ho, some drivers of the growth in money-fund assets aren’t likely to change.
Companies are keeping significantly more cash on hand compared to prior to the pandemic, for one. Moreover, corporate treasurers tend to outsource cash management as rates decline in order to capture yield, rather than grapple with it themselves, helping buffer against any money-fund outflows.
Institutional investors have accounted for roughly half of the US$700 billion of money-fund inflows this year, according to Crane data, which tracks the entire money-market industry. Data from the Investment Company Institute, which is released on a weekly basis and excludes firms’ own internal money funds, puts year-to-date inflows at US$702 billion, and total assets at a record US$6.67 trillion in the week through Nov. 13.
“Retail investors have been used to being paid zero for decades so anything north of that looks like a win,” said Invesco’s Brignac. Still, “there’s going to be cash in motion,” she added.
