Predictions all wrong! The movement of $7 trillion in funds has left Wall Street astonished

This year was supposed to be a year of large-scale outflows from the money market.

Zhitong Finance APP noted that Wall Street forecasters had previously stated that the Federal Reserve's interest rate cuts, along with the subsequent rises in the stock and bond markets, would prompt investors to withdraw cash en masse from money market funds. However, their predictions were completely wrong!

Despite the interest rate cuts and soaring stock markets, businesses and households continue to pour cash into money market funds, leading to total assets held in these accounts exceeding $7 trillion for the first time this week. These funds are used to purchase U.S. Treasury bills and other short-term instruments, and investors have become accustomed to benchmark rates above 5%, highlighting the appeal of rates above 5% to the investor community.

Even if rates now drop to 4.5%, money market funds can still provide stable, nearly risk-free income, which not only supports the financial health of many households but also somewhat offsets the damage caused by interest rate hikes in other areas of the economy. With more and more signs indicating that the Federal Reserve may not further lower the benchmark rate, many on Wall Street now predict that Americans will not soon lose their love for cash.

Laurie Brignac, Chief Investment Officer and Global Head of Liquidity at Invesco, stated, "I find it hard to imagine what would make institutional or retail investors withdraw from money market funds. People think that when the Federal Reserve lowers rates, funds will flow out in large amounts."

This is not only because money market rates remain close to their peak, but also the fact that they are consistent with (and often still higher than) the rates of most alternative currencies continues to attract investors.

Currently, the yield on three-month U.S. Treasury bills is about 4.52%, which is approximately 0.07 percentage points higher than the yield on ten-year U.S. Treasury bills. The yield on the Federal Reserve's overnight reverse repurchase agreement tool (where money market funds typically park their cash) is currently 4.55%.

Additionally, banks are quickly passing on the impact of the Federal Reserve's recent rate cuts to consumers, making the money market a more attractive place for them to store cash.

Goldman Sachs' consumer bank Marcus followed the Federal Reserve's lead, lowering the interest rate on its high-yield savings accounts to 4.1%, while competitor Ally Bank currently offers a rate of 4%.

According to Crane Data, a money market and mutual fund information company, this helped money market funds attract about $91 billion in funds in the week ending Wednesday, bringing total assets to $7.01 trillion. As of November 13, the seven-day yield of the Crane 100 Money Market Fund Index, which tracks the 100 largest funds, was 4.51% Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, stated that "despite interest rate cuts, money market rates remain attractive, and there is significant uncertainty regarding future economic trends, with the yield curve still relatively flat." "Yields must decline significantly for inflows to slow. Historically, yields need to drop to 2% or lower to slow inflows into money market funds or lead to direct outflows."

This sharply contrasts with predictions from companies like BlackRock, which stated last December that it expected a significant amount of money fund assets to shift into equities, credit, or even further out on the Treasury curve.

Apollo Global Management has also indicated in recent months that the Federal Reserve's interest rate cuts and a steepening yield curve could prompt households to move cash elsewhere.

While this has not yet occurred, most market observers now indicate that they expect demand for money funds to decrease in 2025.

JP Morgan noted that historically, the industry tends to see outflows about six months after the Federal Reserve begins a rate-cutting cycle.

Additionally, due to the new government's relatively mild antitrust stance, Trump's electoral victory earlier this month could stimulate a boom in merger and acquisition activity, prompting more companies to deploy cash they have been holding back.

Teresa Ho, head of U.S. short-term interest rate strategy at JP Morgan, stated, "I don't think we are at a turning point, but we are at a stage where the $7 trillion may be nearing its peak, and looking ahead to next year, it is hard to see a repeat of the situation in 2024."

However, Ho noted that some drivers of money fund asset growth are unlikely to change.

On one hand, companies are holding significantly more cash compared to before the pandemic. Additionally, as interest rates decline, corporate finance executives tend to outsource cash management for yield rather than handling it themselves, which helps buffer any outflows.

According to Crane data tracking the entire money market industry, institutional investors accounted for about half of the $700 billion total inflow into money funds this year. Data from the Investment Company Institute shows that total inflows so far this year amount to $702 billion, with total assets reaching a record $6.67 trillion as of the week ending November 13. This data is released weekly and does not include companies' own internal money funds.

Brignac from Invesco stated, "For decades, retail investors have become accustomed to zero yields, so any yield above that level looks like a good deal." However, she added, "inflows will still occur."