(Bloomberg) — The steady rush into money market funds is likely to reverse as the Federal Reserve continues to cut interest rates, giving investors an incentive to shift cash into higher-yielding assets, said Torsten Slok, chief economist at Apollo Global Management.
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“Where will the $2 trillion added to money market accounts go now that the Fed is cutting spending,” Slok wrote in a note to clients on Tuesday, citing inflows into money market funds since the Fed began raising rates in March 2022.
“The most likely scenario is that money will leave money market accounts and flow into higher-yielding assets such as credit, including investment-grade private credit.”
Slok, who warned of such an exodus earlier this year, stuck to his call even as investors continued to pour in. Assets of such funds rose to $7 trillion for the first time ever last week, defying speculation that investors would withdraw cash. as soon as the Fed started cutting rates from the highest level in more than two decades.
The continued inflows, even after the Fed cut rates at its last two meetings, likely reflect the fact that money market funds are typically slower than banks in reducing payouts to investors.
The seven-day return on the Crane 100 Money Fund Index, which tracks the 100 largest funds, was 4.46% as of Nov. 18, just below the lower bound of the federal funds rate. The funds are also attractive to institutions and corporate treasurers, who tend to outsource cash management when interest rates rise rather than grapple with it themselves.
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