Why you may want to cheer for money-market funds

Inflows into money-market funds may slow next year, but they are still expected to be positive. (Image: Pixabay)
Inflows into money-market funds may slow next year, but they are still expected to be positive. (Image: Pixabay)

Summary

  • Money funds remain an attractive place for excess cash, and can help keep a lid on short-term borrowing costs.

Cash might be a trash asset to some risk-loving traders. But it’s a pretty good thing to have sloshing around the economy.

U.S. money-market fund assets have so far through mid-December grown by over $800 billion in 2024, bringing the nearly-two-year gain since the end of 2022 to roughly $2 trillion, according to Investment Company Institute data.

This continuing flow may be a surprise to some. At points in 2024, it often seemed that Federal Reserve interest rate cuts, plus a bullish tilt to equity markets, would push more investors out of cash. Or, at the very least, lead them to begin to lock in some duration by moving from very short-term money markets to somewhat longer-term bond funds.

But for one, thinking of investment flows as a zero-sum game is often not quite right, since every buyer of an asset is sending cash to the seller. In fact, even with U.S. money-market fund assets at nosebleed levels, north of $6.7 trillion, according to ICI’s latest weekly figure, investors are quite aggressively positioned: The cash allocation level in Bank of America’s Global Fund Manager Survey was recently at its lowest since the survey began in 2001.

Instead, what is going on may be more about a shift in where cash lives.

“Money funds are gaining market share from bank deposits, that is the big driver," says Peter Crane, president of Crane Data. He further notes that a growing economy and government spending also play a role.

Money-market funds offer an appealing return, at a 4.39% 7-day annualized net yield as of Dec. 19 in Crane Data’s index of 100 money funds. That will likely come down with the latest Federal Reserve rate cut. But by contrast the national average annual yield for a bank savings account is close to half a percentage point, according to a survey by Bankrate—though some banks may offer much more competitive rates.

In general, many investors and savers have woken up to the possibility of higher rates on their cash. Plus, there is now a lot of attention being paid to the interest available on so-called “sweep" deposits at wealth managers and brokerages.

Of course, money funds take in institutional and corporate money, too. So cash-rich companies play a role. TD Securities rates strategists noted that “some of the growth in [money-market fund] assets is a function of growing corporate balance sheets."

Inflows into money-market funds may slow next year, but they are still expected to be positive. Strategists at Barclays wrote recently that “while we do not expect money fund balances to fall, they may not grow as rapidly as they have."

Indeed, outflows from money funds are also not associated with good times. In fact, they have recently come attached to crises, with institutional and retail funds outflows around the time of the global financial crisis and the Covid-19 pandemic.

Consider this as well: Money funds’ demand for government debt is one thing helping keep short-term yields in check. While the outstanding supply of Treasury bills have risen $2.5 trillion since March 2022, according to the recent note from Barclays strategists, government-only money fund balances have risen by $1.7 trillion.

So for those worried about whether government spending and borrowing might slow the economy by making money more expensive, seeing continuing flows into money-market funds may actually be a relief.

Because one investor’s trash can be everyone else’s treasure.

Write to Telis Demos at Telis.Demos@wsj.com

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