Gush of cash into money market funds tipped to continue in 2024

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Cash market fund managers see no finish in sight to the file inflows they’ve garnered in 2023, as money continues to pour in from buyers hoping to reap the benefits of the very best yields out there in years.

Nearly $1.15tn has flooded into US money market funds since January 1, in accordance with move tracker EPFR, fuelled by the Federal Reserve’s aggressive marketing campaign of rate of interest rises. That could be a far cry from negligible inflows in 2022 and effectively above the common full-year web influx determine of $179bn for 2012-2022. The comparable determine for 2021 was $429bn.

Cash funds usually maintain short-term property together with authorities debt, whose yields have climbed quickly because the central financial institution has turned the screws on financial coverage.

Greater than $217bn poured in between October 31 and November 29 alone, in accordance with the most recent out there knowledge — the largest month-to-month influx since banking ructions in March sparked a flight from strange deposit accounts. These inflows have endured whilst markets are pricing in bets that the Fed is not going to elevate rates of interest once more this cycle, and can lower borrowing prices as quickly because the spring.

Cash market fund property hit an all-time excessive of $5.8tn final week (Nov 29), as buyers proceed to harbour doubts about lengthy dated debt.

Now, main fund homes together with Goldman Sachs and Federated Hermes are predicting that the torrent will carry via to 2024, fuelled by institutional buyers making an attempt to lock in returns as rates of interest stabilise, and earlier than the Fed begins to chop.

“I’m not an enormous spring again” from cash market funds, stated Chris Donahue, chief government of $715bn-in-assets Federated Hermes. “It’s extra seemingly they’re going to get one other trillion in than there’s going to [be] a trillion out.”

“If we’re proper that these charges are going to be right here long run, and that’s the manner it’s going to be for some time . . . Then you definately’re going to receives a commission for being within the cash fund,” he added.

In response to knowledge from the Funding Firm Institute, a collection of authorities retail cash market funds was yielding as a lot as 5.02 per cent as of November 30. A collection of authorities institutional funds was yielding 5.23 per cent — squarely in the course of the Fed’s present goal vary for rates of interest of 5.25 to five.5 per cent.

The newest out there yield was even greater for “prime” institutional funds, which might maintain riskier business paper, at 5.43 per cent.

A lot of this 12 months’s cascade into cash market funds within the US has been pushed by retail buyers somewhat than company treasurers, mutual funds and insurance coverage corporations. The latter usually invests instantly in Treasury payments and different short-dated debt devices as rates of interest are on the best way up, as a result of they will seize the rise in yields extra instantly.

However that modifications, “as soon as the Fed stops and goes on a pause, and that rate of interest has levelled out . . . then institutional buyers are interested in cash market funds, as a result of they do have the identical yield because the underlying quick time period devices [and] they provide lots of diversification for institutional buyers,” stated Shelly Antoniewicz, ICI’s deputy chief economist.

Shaun Cullinan, world head of liquidity options at Goldman Sachs, agreed that it was seemingly that institutional buyers would be a part of the surge into cash market funds in 2024, driving further inflows.

“You usually discover that because the easing cycle begins . . . it’s very seemingly that the yield on cash market funds will exceed the yield on the direct market investments,” stated Cullinan. “You may see institutional buyers pivoting into funds to realize that greater return, as a result of these funds have some embedded period in them.”

Cash market fund inflows within the US this 12 months have far outpaced these in Europe, the place retail buyers have a a lot smaller presence within the asset class. However Cullinan famous that the identical dynamics might play out within the area subsequent 12 months, if financial coverage cycles align.

“We definitely haven’t seen the identical quantity of retail flows in Europe as we have now within the greenback market, or within the States,” he stated.

“However we do see buyers within the European markets, significantly institutional buyers, engaged in direct markets. And if we see the European Central Financial institution embark on an easing cycle and European cash fund returns exceed these of the direct market . . . then I undoubtedly suppose you could possibly see the identical rotation happen,” he added.

“I don’t see this being a US-only phenomenon.”

Extra broadly, Cullinan stated that “the trillion that got here on this 12 months was shocking — so we may definitely be stunned once more subsequent 12 months.”

Whereas the Fed has not recommended it intends to chop rates of interest anytime quickly, slowing inflation and a few indicators of weaker financial knowledge have prompted buyers to wager on declines early subsequent 12 months. However these bets have been shifting quickly as merchants weigh the Fed’s official commentary with hints of cooling off elsewhere within the financial system.

For Cullinan, the amount of money that pours into cash market funds “is determined by the tempo of the easing cycle.”