The Federal Reserve's interest rate hikes over the past 19 months have led to record inflows into money market funds, attracting both institutional and private investors with a 5% yield. The total inflow has reached an unprecedented $1 trillion, according to the Investment Company Institute. These inflows have been evenly divided between government and prime funds, the latter offering a higher premium due to their holdings in banks' commercial paper and ultra-safe Treasury bills.
Despite this trend, October witnessed a significant outflow from US money market funds, with $36bn leaving the sector. This marks the largest monthly decline since April 2022. BofA Securities found this development unusual and suggested that it could be due to extended payments for US corporate taxes due in mid-October.
Simultaneously, sophisticated investors have been extending duration by moving money from the front end into direct markets like Treasury bills or agency debt. This shift is a response to an inverted yield curve scenario that emerged when the benchmark 10-year US government bond yield rose above 5% in October.
However, many organizations continue to park their operating cash in money market funds due to their risk-averse nature. Even in a rate-cutting environment, these funds are not expected to experience significant outflows. With record full-year fund inflows projected at $1.3 trillion, the risk of a substantial drawdown in the money market fund universe is considered very low, as equities would not be an option for these funds. Dreyfus pointed out that despite potential challenges from aggressive bank deposit rates, the stability of money market funds remains attractive to many organizations.
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