Investors Flock to Money Market Funds Ahead of Fed Rate Cut, According to BofA

By Harry Robertson

LONDON – According to Bank of America, investors allocated $37 billion into cash-like money market funds (MMFs) in the week leading up to Wednesday, as they anticipated potential interest rate cuts by the U.S. Federal Reserve in September.

This inflow positions MMFs to achieve their largest three-week cumulative inflow since January, totaling $145 billion, based on data from a financial data provider.

In the same week, investors also directed $20.4 billion into stocks, $15.1 billion into bonds, and $1.1 billion into gold, as reported in Bank of America’s weekly market flow summary.

Many fund managers are optimistic that rate reductions may lead to decreased returns on MMFs, stimulating a shift of funds into stocks and bonds.

Historically, substantial investors are known to gravitate toward money market funds before the Fed lowers rates, as these funds often provide higher returns over longer periods compared to short-term Treasury bills.

Bank of America strategists, led by Jared Woodard, commented, "Rate cuts are not likely to trigger a surge in equity purchases from the $6.2 trillion money market fund sector." They added that historical trends indicate the first rate cut by the Fed often leads to increased cash inflows during a ‘soft landing,’ while bonds likely emerge as the favored asset in the event of a ‘hard landing.’

Recent economic indicators generally suggest a gradual economic slowdown, characterized as a ‘soft landing’ rather than a more severe ‘hard’ scenario.

Data from Bank of America and the financial data provider revealed that investment-grade bonds attracted inflows for the 43rd consecutive week, amounting to $8.1 billion. Additionally, emerging market equities experienced inflows of $4.7 billion, marking their 12th consecutive week of gains, the longest such streak since February 2024.