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Investors have poured $1 trillion into global money market funds so far in 2023, attracted by the best yields in years and uncertainty about the U.S. economic outlook.
Cash has poured into money market funds over the past eight-and-a-half months, a trend largely concentrated in the United States, with inflows expected to reach a record $1.5 trillion by the end of the year, according to the Bank of England. American Securities cited annualized data from traffic tracker EPFR.
Bank of America strategists wrote overnight that continued large cash inflows into such funds, which typically hold very low-risk assets such as short-term government debt that is easy to buy and sell, reflect “a trillion dollars of doubt” about the outlook for Economic and risky assets.
“Cash inflows reflect huge questions about whether the economy is a soft landing or a hard landing, whether the Fed has taken action, a bull market or a bear market,” said Michael Hartnett, investment strategist at Bank of America Securities.
“These major issues have not been resolved, and until they are resolved, you can get 5% risk-free in money market funds, which will attract inflows,” he said, adding that there was “just a lack of confidence” in the current market. .
Since the Federal Reserve began raising interest rates last March to curb inflation, yields on money market funds have soared to a target range of 5% to 5.25%. Meanwhile, riskier asset classes have been volatile in recent months as bets on the possibility of a severe recession faltered.
Inflows into money market funds surged in the spring, with $372 billion in March alone, as the collapse of Silicon Valley Bank and Signature Bank forced savers to seek other refuges for cash.
The torrent has since slowed as concerns about the banking sector have eased. However, EPFR data shows that last month was still the largest August on record for U.S. money market fund inflows, reaching $130 billion.
“Money market fund yields have kept pace with the rapid rise in short-term interest rates and are at their highest levels in 15 years, making them extremely attractive to investors,” said Shirley Antonovich, deputy chief economist at the Investment Company Institute. .”
“With relatively high short-term interest rates likely to persist for some time, we expect investors to continue to utilize money market funds,” she added.
Andrzej Skiba, head of U.S. fixed income at Royal Bank of Canada Global Asset Management’s BlueBay, said the firm’s own money market funds are enjoying strong inflows. He believes this reflects a fallback in investor expectations for when the Fed will start cutting interest rates.
Inflation data released this week showed that rising energy costs pushed prices up more than expected in August, with consumer prices rising 3.7% year-on-year, higher than July’s 3.2% and higher than the market consensus of 3.6%.
“I think the key reason for the re-engagement is not that people are suddenly more worried about the economy [or] It was a flight to safety,” he said.
Instead, “economic data was stronger than people expected.”
