Investors poured cash into U.S. money-market funds for a fifth straight week, offering the latest indication that demand is strong in the face of the Federal Reserve interest-rate cuts.
Some $37 billion was added to the funds in the week ending Sept. 4, bringing the recent streak of inflows to about $165 billion, according to the latest Investment Company Institute data. That put total assets at a record $6.3 trillion, up from a previous peak of $6.26 trillion.
Such strong demand comes just as the debate heats up over whether money-market funds will remain popular once U.S. policymakers begin to lower rates—likely starting later this month. Assets surged thanks to attractive returns brought on by elevated rates, which have lingered at a two-decade high for more than a year.
“We are skeptical money-market fund investors would be willing to shift from a risk free and intraday liquid investment vehicle into much riskier assets simply because of Fed rate cuts,” Bank of America Corp. strategists Mark Cabana and Katie Craig wrote in a note to clients on Thursday.
The funds tend to be slower to pass on the effects of lower rates when compared to banks. Plus, institutions and the likes of corporate treasurers tend to outsource cash management during such periods in order to capture yield, rather than grapple with it themselves.
To the Bank of America strategists, cash is unlikely to move out of the funds unless the central bank’s target rate drops below 2%. If that happens, they expect investors to move the money into other higher yielding fixed income, rather than risk assets like equities.
Barclays Plc. strategist Joseph Abate pointed out that only twice before have money fund balances fallen substantially: Between 2003 and 2005 and after the financial crisis.
During the 2003-to-2005 period, both money fund and checking-account deposits fell as households shifted into equities and mutual funds, Abate wrote in a note. In 2008 to 2010, cash left money-market funds for bank deposits, he wrote.
“We do not expect the Fed’s upcoming rates cuts to pull money out of money funds or shift money into bank deposits,” Abate wrote.
In a breakdown for the period ending Sept. 4, government funds—which invest primarily in securities such as Treasury bills, repurchase agreements and agency debt—saw assets rise to $5.12 trillion, a $37.1 billion increase. Prime funds that tend to invest in higher-risk assets such as commercial paper saw assets rise to $1.05 trillion.
On the institutional side, about $4.51 billion left prime money-market funds as investors shift their allocations ahead of the Securities and Exchange Commission’s latest set of regulations, which are slated to take effect later this year.
This article was provided by Bloomberg News.