Interest Rate Shift Sparks Investor Exodus from Money-Market Funds
As the Federal Reserve continues to push interest rates downward, a significant reversal is expected in the steady influx of cash into money-market funds. According to Torsten Slok, chief economist at Apollo Global Management, investors will soon be incentivized to shift their assets into higher-yielding investments.
A Shift in Investor Behavior
Slok poses a critical question: “Where will the $2 trillion added to money market accounts go now that the Fed is cutting?” He believes the most likely scenario is that investors will abandon money market accounts in favor of higher-yielding assets, such as credit, including investment-grade private credit. Despite investors continuing to pour into money-market funds, Slok remains steadfast in his prediction.
Money-Market Funds Reach New Heights
The assets of money-market funds have swelled to a record $7 trillion, defying expectations that investors would withdraw their cash once the Fed began reducing interest rates. This persistence can be attributed to the fact that money-market funds tend to be slower than banks in reducing payouts to investors. As of November 18, the seven-day yield on the Crane 100 Money Fund Index stood at 4.46%, just below the lower bound of the federal funds rate.
Institutional Investors Drive Demand
Money-market funds remain attractive to institutions and corporate treasurers, who often outsource cash management when rates are elevated rather than managing it themselves. This demand has contributed to the continued growth of money-market funds, despite the Fed’s rate cuts. As interest rates continue to fall, investors will likely seek out higher-yielding alternatives, sparking a significant shift in the market.
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