Investors are continuing to pour cash into money market funds, thanks to their juicy 5% yields. The funds saw cumulative inflows of $163 billion in the first two weeks of 2024, their strongest start to a year on record, according to Bank of America. “It is bucking the trend at this point from what normally happens,” said Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes, which has been in the money market fund business for 50 years. In the month of January, money market funds typically see outflows after having big inflows in December, she explained. Quarterly taxes were also due on Jan. 16 , which can drive some of withdrawals. Yet historic yields continue to attract retail investors. The annualized seven-day yield on the Crane 100 list of the 100 largest taxable money funds is currently 5.16%. That’s slightly off its 5.20% high hit at the end of last year but up from 0.17% on Dec. 31, 2021, according to Crane Data, a firm that tracks money markets. On top of that, institutional investors, who bought direct securities like Treasurys and commercial paper last year, are now starting to switch to money funds in anticipation of Federal Reserve rate cuts, Cunningham said. That’s because there is generally a lag between the cuts and money market fund yields coming down. The Fed’s last rate hike was in July and has it indicated in December it will cut rates three times in 2024. The total assets in money market funds are now at $5.98 trillion, as of the week ended Jan. 10 , according to the latest data from the Investment Company Institute. Still, even as yields in money market funds eventually go down, they will still be attractive, said Peter Crane, founder of Crane Data. He’s anticipating yields won’t go below 4% by the end of the year. “Money market funds may not have the record year they had in 2023, but they are likely going to have a really good year,” he said. Cunningham also sees the retail trade continuing, on top of the institutional flows into the funds. Typically, retail investors have an allocation of about 5% or 10% in cash, including money market funds. These days, it has been double that. While many experts suggest starting to extend duration in fixed income for any money that isn’t needed for an emergency fund or more imminent needs, she doesn’t think retail investors will start to move some funds out of money markets until yields fall below 5%. Cunningham also isn’t expecting the yields to move below 4% in 2024. “If the Fed is true to their inflation goal of 2% and gets somewhere near there this year, that is still a real return of a couple percent in the lowest risk type of product out there,” she said.
