DWS on Money Fund Assets, Factors
DWS posted a brief titled, "U.S. money market funds - a safe haven?" It tells us, "U.S. money market funds (MMFs) have experienced massive inflows since the end of 2022. At just above USD 6 trillion, they currently stand at an all-time high. In our view this isn't about to change: big outflows are unlikely in the shorter-term. But what has driven the enormous interest in this short-term investment opportunity is an important question. As is what would need to happen for capital to be withdrawn equally suddenly. These investments are, by their very nature, short term, and (overly) rapid outflows, reallocating the funds to other asset classes, can certainly happen, making markets volatile." DWS writes, "Money market funds have also seen inflows in the Eurozone recently, but the volumes appear relatively small. The chief reason, in our view, is that European investors place much less emphasis on the security aspect of funds than their U.S. counterparts. Given the much lower importance of money market funds in Europe and the Eurozone, we are only looking at the U.S. instruments in this publication." The piece explains, "In principle, MMFs do not differ from other investment funds in the way they work, and this is also an important reason why retail investors are increasingly using them to park their capital. When investor nervousness and volatility are high in the markets, money market funds tend to become more popular.... Looking at flows into U.S. money market funds over the past decade and a half, it is easy to see that periods of financial market stress have often led to a noticeable increase in volumes. The underlying source of the nervousness, whether geopolitical or from market stresses, did not seem to matter." DWS's article adds, "Research by the Federal Reserve Bank of New York has shown that, in the past, a one percentage point increase in the effective federal funds rate led to a 6-percentage point increase in fund assets over a two-year period because of the close correlation with money market fund yields. This shows that money flows are generally quite slow to react to changes in yields. In our view, however, it is also important to note that the relationship often does not hold during periods of financial stress. A pertinent example is the Covid-19 outbreak in 2020, when a massive increase in money market fund inflows coincided with a sharp decline in policy rates. Another factor in this context is the sometimes stronger, sometimes less pronounced competition between money market funds and investors' deposits at banks.... To summarize, relative attractiveness of course influences inflows into money market funds, but the relationships are complex. Which influencing factor dominates the inflows into money market funds depends very much on the broad market constellation."
