Interest piqued?

There are three main domiciles for global money market funds (MMFs) – the United States, China, and Europe (Chinese MMF AUM edged ahead of Europe in 2022).

US MMFs have seen strong inflows, with AUM increasing by 30% since the Federal Reserve began increasing interest rates in 2022, from both retail and institutional investors (with the latter making up the lion’s share of the growth.)

In Europe, the retail investor base is much smaller, but here too we have seen a similar growth rate with assets up around 25%, predominantly driven by institutional investors. 

Sterling balances are broadly flat from where they were at the beginning of 2022, while offshore US dollar AUM has increased by 30%.

Euro balances, meanwhile, have also seen a larger increase of 30%, with the low volatility (LVNAV) funds gathering about 50% more assets as positive interest rates led to the reinstatement of distributing share classes.

Going with the flow

With perhaps the notable exception of Japan, developed markets appear to be moving into a policy easing cycle. The European Central Bank (ECB) kicked things off in June this year with their first 25bps cut, followed by the Bank of England in August, and the Federal Reserve in September, who cut rates by 50bps.

Money markets are currently priced for further cuts across euros, sterling and US dollars over the next 12 months. This, in turn, could lead to lower MMF yields, which we believe could potentially stabilise at around 2-3.5% depending on the currency.

Amid this backdrop, broader market investors have been eager to see where the cash moved into MMFs (and in particular US dollar MMFs) could go if policy rates move lower.

However, contrary to what you might expect, this picture has initially led to further MMF inflows (not outflows), as MMF yields have fallen at a slower pace than alternative direct cash investments (treasury bills, deposits, or direct money market investments). US institutional investors in particular, have increased their MMF investments despite the potential for Fed cuts.

The chart below shows the market’s expected forward interest rates and the shape of the interest rate curve as at late August.

While we also expect MMF yields to move lower, and AUM to fall as some investors potentially reallocate to longer duration or other asset classes, it’s worth remembering that a significant portion of MMF AUM is for cash management purposes rather than purely being return-seeking.

This is because a key potential attraction for MMFs is their operational utility, and we believe that MMFs will continue to meet these requirements for investors.

Cash to remain sticky?

So while the headline-grabbing inflows for MMFs and all-time AUM highs may be behind us for now, we still believe that positive real short-term yields will be with us for some time. Meanwhile, the operational efficiency of MMFs could also support elevated AUM in the sector – compared with pre-2022 levels – for the foreseeable future.