Money fund assets decreased by $3.25 billion in the latest week to $2.810 trillion in the week ended December 1, according to the most recent weekly statistics from the Investment Company Institute. Though they have declined by $483 billion, or 14.7%, year-to-date in 2010 (following a decline of $547 billion, or 14.0% in 2009), assets have stubbornly remained at or above the $2.8 trillion level for the entire second half of the year. Though down over $1 trillion since their peak of $3.9 trillion in mid-January 2009, money fund assets remain above their level in August 2007, when the Subprime Liquidity Crisis began, and they still remain over $1 trillion higher than their levels exactly 10 years ago.
ICI's latest numbers show Institutional assets, which continue to represent approximately two-thirds of all assets (66.7%), at $1.875 trillion and Retail assets at $942.2 billion. Institutional money funds, which lost almost all of their assets during the first quarter of the year, have declined by $351 billion, or 15.8%. Retail assets, which dropped a sharp 21.2% in 2009, have declined by a more modest $132 billion, or 12.4% in 2010. Crane Data expects very modest outflows in the first half of 2011 and high single digit percentage outflows in the second half as pressure for rate hikes builds. (We look for a decline of about $200 billion, or 7%, in 2011, and modest inflows in 2012 as rates climb towards 1-2%.)
As we mentioned Tuesday (see "Bond Assets Approach Money Fund Levels; MMFs Add Repo In October"), though bond funds have added $461 billion YTD in 2010 and now rival money funds in size (at $2.668 trillion) for the first time ever, there are indications that the inflow party is ending. Bond funds have seen two straight weeks of outflows (according to ICI's "Long-Term Mutual Fund Flows") and may be headed for their first decline in assets since December 2008.
Vanguard CIO Gus Sauter recently released a paper, "Vanguard's investment chief cautions bond investors," which says, "Bonds have been on a roll, with double-digit returns posted by several fixed income categories this year. Such a winning streak may tempt you to think you've got a free lunch: return with no risk. That's hardly the case. Vanguard believes bonds and bond funds can play a valuable role in nearly any investor's portfolio. At the same time, we also believe it's important to have a balanced perspective and keep your eyes open to risks."
Sauter comments, "I'm increasingly worried that people aren't aware of the risks in the bond market. We have very low interest rate levels. But at some point, the economy will strengthen and those interest rates will rebound. Investors who have pushed out further on the yield curve by investing in longer-term bonds will then see a greater decline in the principal value of their investments. When you're seeking yield by moving into longer-term bonds, you're exposing yourself to greater fluctuations in principal. Those fluctuations are likely to be negative at some point in the future, and they'll be negative by a greater magnitude for longer-term bonds than for shorter-term bonds."
