Risk-averse investors have poured trillions into money-market
funds since 2019. Our Chief Fixed Income Strategist explains
why investors shouldn’t expect this money to pivot to equities
and other risk assets as rates fall.
----- Transcript -----
Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan
Stanley’s Chief Fixed Income Strategist. Along with my colleagues
bringing you a variety of perspectives, today I'll be talking
about money market funds.
It's Tuesday, August 6th at 3pm in New York.
Well over $6.5 trillion sit in US money market funds. A popular
view in the financial media is that the assets under management
in money market funds represent money on sidelines, waiting to be
allocated to risk assets, especially stocks. The underlying
thesis is that the current level of interest rates and the
consequent high money market yields have resulted in accumulation
of assets in money market funds; and, when policy easing gets
under way and money market yields decline, these funds will be
allocated towards risk assets, especially stocks. To that I would
say, curb your enthusiasm.
Recent history provides helpful context. Since the end of 2019,
money market funds have seen net inflows of about $2.6 trillion,
occurring broadly in three phases. The first phase followed the
outbreak of COVID, as the global economy suddenly faced a wide
array of uncertainties. The second leg mainly comprised retail
inflows, starting when the Fed began raising rates in 2022.The
third stage came during the regional bank crisis in March-April
2023, with both retail and institutional flows fleeing regional
bank deposits into money market funds.
Where do we go from here?
We think money market funds are unlikely to return to their
pre-COVID levels of about $4 trillion, even if policy easing
begins in September as our economists expect. They see three 25
basis point rate cuts in 2024 and four in 2025 as the economy
achieves a soft landing; and they anticipate a shallow
rate-cutting cycle, with the Fed stopping around 3.75 per cent.
This means money market yields will likely stabilize around that
level, albeit with a lag – but still be attractive versus cash
alternatives.
In a hard landing scenario, the Fed will likely deliver
significantly more cuts over a shorter period of time, but we
think investors would be more inclined to seek liquidity and
safety, allocating more assets to money market funds than to
alternative assets.
Further, money market funds can delay the decline in their yields
by simply extending the weighted average maturities of their
portfolios and locking in current yields in the run-up to the
cutting cycle. This makes money market funds more attractive than
both short-term CDs and Treasury bills, whose yields reprice
lower in sync with rate cuts. This relative appeal explains much
of the lag between rate cuts and the peak in assets under
management in money market funds. These have lagged historically,
but average lag is around 12 months.
Finally, it is important to distinguish between institutional and
retail flows into and out of money market funds, as their
motivations are likely to be very different. Institutional funds
account for 61 per cent of money market funds, while funds from
retail sources amount to about 37 per cent. When they reallocate
from money market funds, we think institutional investors are
more likely to allocate to high-quality, short-duration fixed
income assets rather than riskier assets such as stocks,
motivated by safety rather than level of yield. Retail investors,
the smaller segment, may have greater inclination to reallocate
towards risk assets such as stocks.
The bottom line: While money market fund assets under management
have grown meaningfully in the last few years, it is likely to
stay high even as policy easing takes hold. Allocation toward
risk assets looks to be both lagged and limited. Thus, this
'money on the sidelines' may not be as positive and as imminent a
technical for risk assets as some people expect.
Thanks for listening. If you enjoy the podcast, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.