Investor Dash to Cash Persists Ahead of Fed Rate Cut, According to BofA – Reuters

By Harry Robertson

LONDON (Reuters) – In the week leading up to Wednesday, investors funneled $61 billion into cash-like money market funds as anticipation grew for the Federal Reserve’s first interest rate cut in four years, as reported by Bank of America on Friday.

Why It Matters
Many fund managers are hopeful that a decrease in rates will reduce returns on money market funds (MMFs), prompting a significant shift of capital into stocks and bonds. However, contrary to expectations, large investors typically gravitate towards MMFs because the short-term fixed income assets they hold often provide higher yields for longer periods compared to short-term Treasury bills, which are more sensitive to changes in Fed interest rates.

By the Numbers
During the past week, investors added $60.8 billion to cash funds, contributing to the largest inflow into cash of $231 billion over the past five weeks, the most substantial since December 2023, according to data from EPFR cited in BofA’s weekly Flow Show report. In addition, $9.5 billion was invested in bonds, though U.S. Treasuries faced their largest outflow since January at $1.9 billion. Stock funds saw an influx of $3 billion, while gold attracted $600 million.

Context
Recent U.S. economic indicators suggest a cooling labor market, with declines in job openings and slowing payroll growth, which could position the Fed to lower rates in its upcoming meeting on September 18. Current U.S. interest rates reside in the 5.25% to 5.5% range, resulting in yields on money market funds being at their highest since before the 2008 financial crisis. Currently, over $6.3 trillion is invested in U.S. money market funds, a significant increase from $3.6 trillion at the pandemic’s onset, according to data from the Investment Company Institute.

Looking Ahead
Investors will closely monitor U.S. economic data, particularly the employment report for August set to release on Friday, for insights on whether the Fed will implement a 25 or 50 basis point cut this month. Negative economic developments could trigger a rush toward safe-haven government bonds.