Inflows into money market funds (FRGXX), (FNSXX), (FMPXX), (MUTF:SPAXX) in the fourth quarter could increase assets under management beyond $6T by the end of the year, as higher-for-longer interest rates and negative returns in other asset classes are making them very attractive.
MMF AUMs increased by $45B to $5.9T after two weeks of outflows, according to J.P. Morgan’s North America Fixed Income Strategy, published on Friday. Year-to-date, they have increased by over $800B.
Just in the months of March, April, and May, institutional MMF balances grew by about $375B.
This rise in balances is due to cash yields above 5% and negative returns in riskier asset classes.
“Because MMFs continue to see inflows despite interest rate cuts, shareholders continue to see them as a cash management liquidity tool rather than as an investment asset class,” J.P. Morgan analysts said. Shareholders use MMFs as “low-cost, efficient, transparent cash management vehicles that offer market-based rates of return, rather than as part of their investment portfolios.”
These are shareholders, such as corporations and state and local governments, who typically value returns of capital versus returns on capital.
In addition, when the Fed begins to cut rates, MMF yields tend to lag yields of direct cash alternatives, such as Treasury bills, attracting flows from other liquidity alternatives.
Also, historically, flows into MMFs do not stop even as the cycle curve starts to steepen. “It’s not until the curve more or less stabilizes that outflows begin to take place,” J.P. Morgan analysts said.
They also said that the yield spread between cash and bonds is projected to remain negative for most of 2024.
So, a shift from cash to fixed income is highly unlikely, they said.
“We do not anticipate the relative value of MMFs versus deposits, short-term bond funds, equities, etc. to change dramatically in the near future.”
