Almost US$140 billion poured into money market funds and traders on the sidelines

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Retail investors are piling into cash following a brutal sell-off in financial markets this year that saw trillions of dollars in losses, dampening enthusiasm for riskier assets.

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Nearly US$140 billion has poured into retail money market funds so far in 2022, according to the Investment Company Institute, taking the size of these vehicles to US$1.55 trillion after 10 straight weeks of fresh investment. Inflows amounted to nearly US$36 billion in the last three weeks alone.

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That rush for cash continues after a long and volatile sell-off in US equity markets this year, which has stripped nearly US$15 trillion from the valuations of publicly traded companies. Wall Street’s benchmark S&P 500 index last month ended its longest quarterly streak since the 2008 financial crisis.

The market turmoil – fueled by high inflation and rising borrowing costs as the US Federal Reserve turns the screws on monetary policy – has weighed heavily on investor and consumer confidence. A growing number of economists are now warning of a recession in the coming year.

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“It’s been one of those years where everybody’s been popular and it’s really an environment where you feel like you don’t want to dip your toes in the water,” said Joe D’Angelo, who runs asset manager PGIM Fixed Income’s. money market business.

The higher yields available on money market funds – which have risen steadily since the Fed began raising interest rates in March – are also attracting everyday investors, especially as interest rates on savings accounts at major banks such as JPMorgan Chase & Co. and Bank of America Corp hover near zero.

Fidelity Investments’ government money market fund is now yielding about 2.6 percent, while Vanguard Group Inc.’s US$218 billion federal money market fund rose. to 2.83 percent this month.

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It was one of those years when everyone had a torch

Joe D’Angelo

An index of the 100 largest money market funds run by Crane Data LLC, which tracks the industry, shows returns have risen on average to 2.77 percent from 0.02 percent at the start of the year.

“For individuals, for the first time in a long time, you can get some return,” Steve Sosnick, chief strategist at Interactive Brokers LLC, said of the funds. “For many years we have heard ‘there is no alternative’ but now there is an alternative.”

Retail investors are also joined by large asset managers, who are keeping more money on the sidelines as they try to stay out of the constraints in both equity and fixed income markets. A closely followed Bank of America survey showed last week that asset managers in October were holding 6.3 percent of their portfolios in cash, the highest level since April 2001.

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But even as many seek refuge in cash, institutional money market funds are still hit by US$87.4 billion in redemptions since the Fed began raising interest rates this year, taking outflows for 2022 above US$250 billion.

Part of the reason for the withdrawals is that companies spend the surplus they managed to overcome the pandemic. Analysts at Goldman Sachs Group Inc. warned last month that “cash balances are back to pre-pandemic norms” for riskier blue-chip and junk-rated firms.

For many years we have heard ‘there is no other choice,’ but now there is another choice

Steve Sosnick

“Corporate money was used to pay off debt, it was used to invest in their businesses and with inflation things are more expensive,” said Matt Jones, head of liquidity distribution at Western Asset Management Co. “The costs of running a business are higher than they used to be.”

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However, executives at three money market funds said the withdrawals by companies and money managers did not indicate less appetite for cash or cash investments. Instead, they faced stiff competition from both domestic and non-US banks offering high interest rates to corporate clients in an attempt to attract deposits. Others, including some asset managers, chose to manage that cash themselves.

“We saw more sophisticated clients going directly into the markets themselves,” said John Tobin, chief investment officer of asset manager Dreyfus Cash Investment Strategies, adding that some clients invested in short-term instruments such as commercial paper, Treasury bills or bank deposit certificates. .

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Tobin said such action has not always worked out for investors, as the Fed has been raising rates faster than many investors expected.

“They were expecting Nutrition increases to come to market in the future … thinking they could get better performance from initial products,” he said. “In many cases, they were wrong because people didn’t expect the Fed to be as aggressive as (it is).”

The US central bank raised interest rates by a whopping 0.75 percentage points over each of its three meetings, lifting its target range to 3 to 3.25 percent.

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By contrast, money market funds have steadily moved into shorter-maturity investments since the start of the year, with many taking advantage of the Fed’s overnight reverse repurchase facility – a program only accessible to some banks and money managers on it. This has enabled the funds to benefit from higher rates once the central bank raises borrowing costs.

Appetite for cash will be tied to the Fed’s policies as well as broader volatility in financial markets, investors said. Some have warned that if and when the Fed decides it has a grip on inflation, cash could become less attractive.

Money market funds haven’t been popular for long, but managers are wondering if their vigilance will continue, said John Croke, head of active fixed income products at Vanguard. “If inflation remains high, it ensures that rates will remain positive for longer, and that money market funds will retain their relevance for longer.”

The Financial Times Ltd.



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