The rush of cash into the US money-market funds is showing few signs of slowing as it secured a record $7.4 trillion in assets.
Investors have poured more than $320 billion into the funds so far this year, according to Crane Data LLC, making it one of the biggest benefactors of the Federal Reserve’s current monetary policy. That’s something of a surprise for those on Wall Street who’d gone into 2025 assuming officials would lower interest rates and sap the attractive returns offered by the industry.
“$7 trillion can easily be $7.5 trillion in 2025,” said Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes. “Five-percent-plus rates were nirvana, four-percent-plus is still very good — and if we dip down into the high threes, that’s quite acceptable as well.”
The average simple seven-day yield is now 3.95% for government funds and 4.03% for prime, an 8 basis point spread, according to Bank of America Corp. It’s a compelling backdrop as some 600 participants gather at the annual Crane’s Money Fund Symposium, which kicks off Monday in Boston.
Money funds have seen their coffers swell in recent years, notably in early 2020 for their haven appeal and again as the Fed’s rate-hiking cycle boosted yields. Even as the Fed pivoted to cutting rates last year, assets continued to rise, with these funds typically slower to pass along the effects of lower rates when compared to banks.
Households have been a key driver of the inflows. Since the Fed started raising rates in March 2022, total assets under management in US money funds have swelled by roughly $2.5 trillion, and retail investors have accounted for about 60% of that, Investment Company Institute data show. Data from ICI exclude firms’ own internal money funds, unlike Crane Data, which tracks the money market industry.
Inflows have continued even as the industry sees some investors embrace alternatives, such as ultra-short funds in the fixed income or equities, Cunningham said. Overall, though, it’s a far cry from the exodus of cash from money-market funds that some on Wall Street had forecast.
“It’s not surprising asset levels have held on and grown,” said Michael Bird, senior fund manager at Allspring Global Investments. “Even if the Fed picks up its easing campaign this year, rates will still be relatively high.”
The Fed last week laid out forecasts for two quarter-point rate cuts this year, aligning with market pricing. Although the risk that conflict in the Middle East drives up oil prices and causes a resurgence in inflation remains an uncertatinty, traders see a quarter-point reduction as likely in September and all but guaranteed by October.
Given that interest-rate backdrop, money-market funds are trying to extend the weighted-average maturity — known as WAM — of their holdings as long as possible to capture elevated yields.
Fund managers have also adjusted holdings to compensate for the effects of debt-ceiling drama. While Wall Street strategists largely expect the government to raise the debt limit as part of the reconciliation process by late of July or early August, some funds have put more cash toward repurchase agreements — loans collateralized by Treasuries or agency debt — as an alternative.
Still, “the expectation is when the debt ceiling gets resolved, there will be a significant increase in bill issuance, which helps yields,” Bird said. “Uncertainty is helping our product.”
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