With interest rate coming in at more than 5.5% after the Fed increase the rate by 0.25 basis points two weeks ago , the inflow of cash to banks and shorter term investment has been on the rise and this has cause an increase in Money Market Funds asset, reaching a record high at the end of last week.
Based on data unveiled by the Investment Company Institute, a prominent organization representing regulated investment funds in the United States, an impressive $29 billion was injected into US Money Market Funds in the preceding week alone. Consequently, the total assets of these funds soared to an impressive $5.52 trillion.
Investors have been increasingly drawn to money funds since the Federal Reserve embarked on one of the most assertive tightening cycles in recent decades, aimed at curbing the rise of inflation. This surge in interest led officials to raise their key policy rate to a range of 5.25% to 5.5%, marking its highest point in 22 years. Money funds have outpaced banks in effectively transmitting these advantages to investors.
Breaking down the data for the past week, government funds—largely invested in securities such as Treasury bills, repurchase agreements, and agency debt—experienced a remarkable rise in assets, reaching $4.54 trillion with an additional $22.7 billion influx. Prime funds, known for their inclination toward higher-risk assets like commercial paper, observed a substantial asset increase to $857 billion, marking a $3.52 billion uptick.
In terms of risk assessment, it’s crucial to note that Fitch downgraded the US Debt rating from AAA to AA+, signaling a somewhat diminished level of security for government securities. Considering that Money Market Funds primarily invest in Treasury Bills, investors now face increased concerns about the elevated risk associated with their investments. Consequently, they might seek higher rates from Money Market Funds to compensate for this augmented risk perception.
August 6, 2023
Delino Gayweh
Serrari Financial Analyst
photo source freepik
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