Record Full-Year Inflows into Money Market Funds

The Federal Reserve’s series of interest rate increases over the past 19 months has resulted in record inflows into money market funds, attracting both institutional and retail investors with yields around 5%. The total inflow has reached an unprecedented $1 trillion, as reported by the Investment Company Institute. These flows have been split evenly between government and prime funds, with prime funds offering a higher return due to their investments in commercial paper issued by banks and highly secure Treasury bills.

However, October saw a notable outflow from U.S. money market funds, with $36 billion exiting the sector—representing the largest monthly drop since April 2022. Analysts at BofA Securities found this trend unusual and speculated that it might be influenced by corporate tax payments typically due in mid-October.

At the same time, many sophisticated investors are extending their durations by reallocating funds from short-term investments into direct markets, such as Treasury bills or agency debt. This adjustment is a reaction to the inverted yield curve that appeared when the benchmark yield on the 10-year U.S. government bond surpassed 5% in October.

Despite these shifts, many organizations continue to place their operational cash in money market funds due to their conservative nature. Even in a declining interest rate environment, these funds are not expected to face significant outflows. Projections indicate that total fund inflows for the year could reach $1.3 trillion, minimizing the risk of a major withdrawal from the money market fund landscape, as equities remain unattractive to these funds. Dreyfus highlighted that, despite potential challenges posed by competitive bank deposit rates, the appeal of money market funds’ stability endures for many organizations.