Investors have poured a staggering $1 trillion into global money market funds in 2023, lured by the best yields available in years and growing uncertainty surrounding the US economy. This torrent of capital flowing into money market funds, primarily concentrated in the United States, sets these investment vehicles on a trajectory to receive record-breaking inflows totaling $1.5 trillion by the year’s end, as reported by Bank of America Securities, citing annualized data from the flow tracker EPFR.

Strategists at the US bank have noted that this persistent surge of cash into money market funds, known for holding low-risk assets such as short-dated government debt that are easily tradable, signifies “one trillion dollars of doubt” regarding the economic outlook and riskier assets. Michael Hartnett, an investment strategist at BofA Securities, emphasized that these inflows reflect the profound uncertainty surrounding key economic questions, including whether a “soft or hard landing” is imminent, the Federal Reserve’s stance on interest rates, and the market’s trajectory between bull and bear territory. Hartnett explained that until these critical uncertainties are resolved, and given the opportunity to earn a risk-free return of 5 percent in money market funds, these funds will continue to attract significant inflows. He pointed out that there is a current “lack of conviction” in the markets.

Money market fund yields have surged since the Federal Reserve began raising interest rates in March of the previous year to combat inflation, pushing their target range to 5 percent to 5.25 percent. Meanwhile, riskier asset classes have experienced volatility in recent months as speculations regarding a potential major economic downturn have oscillated.

The surge in inflows into money market funds gained momentum in the spring, with a massive $372 billion entering in March alone. This influx was partially driven by concerns following the collapses of Silicon Valley Bank and Signature, leading depositors to seek alternative safe havens for their funds. Although the torrent has slowed as concerns over the banking sector have eased, last month marked the largest August on record for US money market fund inflows, according to EPFR data, with an influx of $130 billion.

Shelly Antoniewicz, Deputy Chief Economist at the Investment Company Institute, noted that money market fund yields have kept pace with the rapid rise in short-term interest rates, reaching their highest levels in over 15 years, making them highly appealing to investors. She expects investors to continue favoring money market funds as relatively high short-term interest rates are expected to persist.

Andrzej Skiba, Head of BlueBay US Fixed Income at RBC Global Asset Management, explained that the firm’s own money market funds are experiencing robust inflows, attributing this trend to investors extending their expectations for when the Federal Reserve will begin reducing interest rates.

Inflation data released this week indicated that rising energy costs pushed year-on-year price growth to 3.7 percent in August, surpassing July’s 3.2 percent and consensus forecasts of 3.6 percent. Skiba suggested that the resurgence in investment activity is not driven by heightened economic concerns but rather by stronger-than-anticipated economic data.

As economic uncertainties persist, investors continue to seek safe harbors, with money market funds emerging as a compelling choice in a volatile financial landscape.

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September 18, 2023
Delino Gayweh
Serrari Financial Analyst