Last week, Investor's Business Daily published the article, "With Fed Set For Pivot, Have Money Market Funds Peaked? These Stock Market Alternatives Await." They tell us, "More than $1 trillion poured into money market funds in 2023 as investors took advantage of remarkable short-term interest rates. But with the Federal Reserve moving toward a pivot on monetary policy, it looks to be the time to be jumping onto a plethora of other investing opportunities. `This includes the stock market, despite its powerful gains this year. Money market funds yields are closely tied to the federal funds rate. This is the interest rate banks charge each other for overnight loans. It now looks almost certain the Federal Reserve will start cutting this rate next year, possibly as soon as March." (Note: Thanks again to those of you who supported our Money Fund University in Jersey City last week! Attendees and Crane Data subscribers may access the recordings and materials via our "Money Fund University 2023 Download Center.")
IBD's piece explains, "Sage Advisory Services Co-Chief Investment Officer Thomas Urano told Investor's Business Daily that alternatives have become more appealing following the latest Federal Open Market Committee meeting. 'I think what we've got is some clarity now about the Fed's view of policy -- where they think they are now, where they think they are likely going,' he said. 'The idea that some of the Fed members are expecting the policy rate to go lower in the coming year or 18 months has given a lot of comfort to investors that they can think about reallocating their money market fund position into duration, other areas of fixed income, (and) areas that might benefit in an environment where rates might be coming back down some."
It continues, "CFRA Chief Investment Strategist Sam Stovall told IBD that money markets will continue to offer elevated yields as long as the Fed funds rate stays where it is. But there could be a big reallocation around the corner when interest rates start to decline. 'When the Fed starts cutting rates, however, we could see a stampede out of cash and into higher yielding investments' he said. 'I think investors will flock to higher-yielding, high quality equities, since they serve as bond proxies and also offer upside price appreciation potential."
The article also tells us, "EPFR data shows that inflows for all U.S. Money Market Funds stands at $1.17 trillion year to date. The market intelligence company's director of research, Cameron Brandt, believes more cash could come into money market funds for a while. This is despite mammoth stock market gains."
Brandt comments, "Until U.S. interest rates start to decline, I think we'll see more inflows.... The alternatives come with question marks. U.S. equity markets are being driven by several themes such as 'soft landing' and AI that may not play out the way markets expect/hope, and the combination of U.S. borrowing requirements and the Fed's balance sheet runoff raise some questions about the dynamics for Treasuries."
In other news, Bloomberg featured a video interview with Wells Fargo's Head of Corporate and Public Entity Strategy Vanessa McMichael. Entitled, "2023 the Year for Money Market Funds," which says McMichael "makes the case for why money market funds will continue to be an attractive investment in 2024. She speaks to Bloomberg's Romaine Bostick and Katie Greifeld on "Bloomberg Markets: The Close."
McMichael says, "This year has undoubtedly been the year of the money market funds. Right now, money market funds are sitting at about $6 trillion. To put that number into perspective, at the end of 2019, total money market fund assets were only $3 trillion.... Still a large number, but we've since doubled year to date. There's been about $1 trillion in cash that has flown into money market funds throughout this year.... You can't deny the value. So when you look at the [yield] curve, the curve has been inverted. And over the past couple of months, money market fund yields have remained stable while the rest of the curve has continued ... to decline." Asked about `rollover risk, she responds, "So in my role, I'm helping corporate investors develop fixed income investment strategies that they're comfortable executing in-house.... Within that framework [the] goals [are] preservation of capital and liquidity. [M]oney market funds, they naturally fit those goals, so money market funds are a very active investment vehicle for these sorts of investors. But ... we think that these investors do need to think about extending duration."
McMichael continues, "We're seeing that even within the money market funds, the WAMs that have doubled year to date, because they get it every time the Fed is about to pivot and ease its policy rate. We see WAMs extend because they're trying to capture that yield.... While money market funds are extending WAM, which are going to keep yields a little bit more elevated versus other front end fixed income products, that's going to continue to add to the value proposition in money market funds. So no, I don't think we're going to see outflows in the near term because once the Fed begins to ease money market fund rates are only going to ease very slowly."
She explains, "Money market funds, their goals are really ... the same as the corporate investors that I talked to -- they're trying to earn current income by preserving capital and maintaining liquidity. So, what I'm talking about extending WAMs, we're talking about going from 13 days to 34 days, Right? It's relative. And they can only invest out to 13 months, at least those 2a-7 money market funds where most of our corporate clients are investing their operating funds. So [having the] same exact goals, ... means we're looking at a very defined list of fixed income alternatives that we even can invest in."
Finally, McMichael adds, "Well, you know, what's interesting is that growth that I shared about this past year-to-date and to 2023, that's total assets, so institutional and retail. As next year progresses and rates continue to fall. I do think that there are a number of corporate investors already invested in money market funds. They have excess cash. We're trying to convince them to consider extending themselves a little bit, but I think money market funds are comfortable. Again, they check those the preservation of capital box, they check the liquidity box in there same day liquid. There's substitute for bank deposits, which has been another really big conversation with the corporate investors I speak to because of what happened in March of this year.... `I don't I can't put a specific number on it, but I would not be surprised to see more inflows into money market funds next year."
