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Investors have poured $1tn into global money market funds in 2023, attracted by the best yields available in years and uncertainty over the outlook for the US economy.
The flood of cash into money market funds over the past eight and a half months — a trend concentrated mainly in the US — puts the vehicles on course for record inflows of $1.5tn by the end of this year, according to Bank of America Securities, citing annualised data from flow tracker EPFR.
Strategists at the US bank wrote overnight that the persistent flood of cash into such funds, which typically hold very low risk assets such as short-dated government debt that are easy to buy and sell, reflected “one trillion dollars of doubt” about the outlook for the economy and riskier assets.
“The inflows to cash reflect a tremendous amount of doubt as to whether it’s a soft or hard landing, whether the Fed’s done or not done, whether it’s a bull market or still a bear market,” said Michael Hartnett, investment strategist at BofA Securities.
“Those big questions haven’t been resolved — and until they are, and you can get 5 per cent risk free in money market funds, it’s going to attract inflows,” he said, adding there is “just a lack of conviction” in markets at the moment.
The yields available on money market funds have shot higher since the Federal Reserve started jacking up interest rates in March last year to curb inflation, taking them to a target range of 5 per cent to 5.25 per cent. Meanwhile, riskier asset classes have been volatile in recent months, as bets on the likelihood of a major economic downturn have oscillated.
Inflows into money market funds escalated in the spring, with $372bn flooding in during March alone, as the collapse of Silicon Valley Bank and Signature sent depositors seeking other havens for their cash.
The torrent has since slowed as concerns over the banking sector have eased. But last month still marked the biggest August on record for US money market fund inflows, EPFR data shows, at $130bn.
“Money market fund yields have kept pace with the rapid rise in short-term interest rates and are at their highest levels in over 15 years — making them incredibly attractive to investors,” said Shelly Antoniewicz, deputy chief economist at the Investment Company Institute.
“With relatively high short-term interest rates likely to continue for some time, we would expect investors to continue to make use of money market funds,” she added.
Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management, said the firm’s own money market funds were enjoying strong inflows. In his view, this reflected investors pushing back their expectations for when the Fed will start cutting interest rates.
Inflation data released this week showed that rising energy costs had pushed price growth above forecasts in August, with consumer prices rising by 3.7 per cent year on year — up from 3.2 per cent in July and above consensus forecasts of 3.6 per cent.
“I think the key reason why you’re seeing money re-engaging is not because people are suddenly more worried about the economy [or] it’s a flight to safety move,” he said.
Rather, “the economic data has been more robust than people have expected”.