Surge in US Money Market Funds Reaches $7.4 Trillion

The inflow to US money market funds has reached a staggering $7.4 trillion, showing little sign of slowing down.

So far this year, investors have added over $320 billion, making these funds significant beneficiaries of the Federal Reserve’s current monetary policy, according to Crane Data LLC. This trend comes as a surprise to many on Wall Street, who anticipated rate cuts by 2025 and a reduction in the appealing returns these funds provide.

Deborah Cunningham, Chief Investment Officer of Global Liquidity Market at Federated Hermes, remarked, “$7 trillion could easily become $7.5 trillion by 2025.” She added, “Rates above 5% are ideal, and even rates above 4% look very good. Even if we dip into the high threes, that’s still quite acceptable.”

Data from Bank of America Corp shows that the average seven-day yield stands at 3.95% for government funds and 4.03% for Prime funds. This backdrop coincides with around 600 participants convening at the annual Crane Money Fund Symposium in Boston.

Money market funds have increased in size significantly over recent years, particularly since early 2020, when many sought safety, and as rising Fed rates elevated yields. Even with calls for rate cuts last year, assets have continued to grow. Generally, these funds lag behind banks in passing on lower fees.

Households have played a key role in this influx. Since the Fed began raising rates in March 2022, US money fund assets have grown by about $2.5 trillion, with retail investors accounting for roughly 60%. Unlike Crane Data, which tracks the money market industry, the ICI excludes its internal funds from this data.

Despite some investors exploring other options like bond and equity super-cons funds, the flow into money market funds remains robust. This contradicts earlier expectations from certain Wall Street analysts.

Michael Bird, Senior Fund Manager at Allspring Global Investments, stated, “We remain dedicated to offering various services to our customers. Even if the Fed achieves a mitigation campaign this year, prices will likely stay fairly high.”

Recently, the Fed adjusted market predictions for potential rate cuts over the next two quarters. There’s lingering uncertainty about how conflicts in the Middle East might affect oil prices and inflation. Nonetheless, traders generally anticipate a quarter-point cut in September, with more assurance by October.

Given the current interest rate climate, money market funds are aiming to extend their weighted average maturities to maintain high yields as long as possible. Fund managers are also tweaking their holdings to offset the effects of the recent debt ceiling discussions. Most on Wall Street hope for an increase in debt limits as part of the resolution process later this summer. In light of this, some funds are reallocating cash into loan-buying agreements backed by financial or agency obligations.

Nonetheless, Byrd noted, “Expectations are that once the debt cap is resolved, invoices will rise significantly, which will support yields. Uncertainty ends up benefitting our products.”