The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows MMF assets rebounding after plunging last week on the Microsoft/Activision deal and California tax payments. ICI's asset series rebounded $24.9 billion the past week to $5.633 trillion, following their second largest drop ever ($98.8 billion) the prior week. Assets are up by $898 billion, or 19.0%, year-to-date in 2023, with Institutional MMFs up $385 billion, or 12.6% and Retail MMFs up $512 billion, or 30.5%. Over the past 52 weeks, money funds have risen a massive $1.048 trillion, or 22.9%, with Retail MMFs rising by $614 billion (39.0%) and Inst MMFs rising by $434 billion (14.4%).
The weekly release says, "Total money market fund assets increased by $24.88 billion to $5.63 trillion for the week ended Wednesday, October 25, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $23.12 billion and prime funds increased by $261 million. Tax-exempt money market funds increased by $1.50 billion." ICI's stats show Institutional MMFs rising $16.3 billion and Retail MMFs rising $8.6 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.597 trillion (81.6% of all money funds), while Total Prime MMFs were $915.2 billion (16.2%). Tax Exempt MMFs totaled $120.2 billion (2.1%).
ICI explains, "Assets of retail money market funds increased by $8.57 billion to $2.19 trillion. Among retail funds, government money market fund assets increased by $2.92 billion to $1.43 trillion, prime money market fund assets increased by $4.67 billion to $651.82 billion, and tax-exempt fund assets increased by $984 million to $107.51 billion." Retail assets account for over a third of total assets, or 38.9%, and Government Retail assets make up 65.3% of all Retail MMFs.
They add, "Assets of institutional money market funds increased by $16.30 billion to $3.44 trillion. Among institutional funds, government money market fund assets increased by $20.20 billion to $3.17 trillion, prime money market fund assets decreased by $4.41 billion to $263.35 billion, and tax-exempt fund assets increased by $513 million to $12.69 billion." Institutional assets accounted for 61.1% of all MMF assets, with Government Institutional assets making up 92.0% of all Institutional MMF totals.
According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets broke the $6.0 trillion level on Sept. 1 and hit a record $6.113 trillion on Thursday, Oct. 5, before falling back to $6.011 trillion Wednesday (10/25). Assets have fallen by $62.0 billion in October after rising by $93.9 billion in September, $98.3 billion in August and $34.7 billion in July. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.
In related news, J.P. Morgan published a "Short-Term Market Research Note" entitled, "MMF AUMs: Will you stay or will you go?" They write, "The relentless demand for MMFs has been one of the bigger highlights in the money market this year. YTD, taxable MMF AUMs have increased by over $800bn and currently stand at nearly $5.9tn. Typical seasonal inflows in 4Q could easily push those balances beyond $6tn by the end of this year. The regional banking crisis in March, alongside an inverted yield curve that has cash yielding above 5%, and negative returns in riskier asset classes, have all contributed to the impressive rise in MMF balances this year."
The piece asks, "In 2024, what will happen to this cash? The answer not only has implications across the fixed income markets, but also more specifically in terms of demand for front-end assets, including RRP, and as a result, QT. Given the current outlook for interest rates, one common theme we have heard from market participants is the expected shift into longer duration fixed income, funded from drawdowns in cash. In essence, do we anticipate another Great Rotation, similar to the one in 2009-2012, when over $1tn rotated out of MMFs and into bond funds, reducing MMF balances by about a third?"
JPM replies, "We think a shift from cash to fixed income is unlikely. A look at MMF flows going back to 1995, spanning over three easing cycles, shows that MMFs continue to see inflows even as the Fed begins to cut rates. Notably, this dynamic is applicable to both institutional and retail flows. Intuitively, this makes sense, as MMF yields tend to lag yields of direct cash alternatives such as T-bills when the Fed begins to cut rates, thus attracting flows from other liquidity alternatives. We also took a look at MMF flows versus changes in the curve shape. [F]lows into MMFs tend to continue even as the curve begins to disinvert/steepen; it's not until the curve more or less stabilizes that outflows begin to take place."
They comment, "Additionally, when we think about MMF flows, we take into consideration whether the cash residing in MMFs is used for cash management/liquidity purposes or whether it is used as an investment asset class as part of one's overall investment portfolio. For the most part, market participants use MMFs for the former reason, seeing MMFs as low-cost, efficient, transparent cash management vehicles that offer market-based rates of return. This is particularly true of institutional MMF shareholders such as corporations and state and local governments, who typically value return of capital versus return on capital. Yield is secondary."
The article also tells us, "The fact that MMF AUMs reached nearly $5tn in 2021, when rates were at zero, equities rallied, and the rates curve was solidly in positive territory, is supportive of this view. The recent regional banking crisis provides another example, after which institutional MMF balances grew by [about] $375bn over the months of March, April, and May. Given that these inflows were driven by uninsured depositors turning to other cash alternatives in order to diversify their liquidity needs, we believe this money is here to stay and unlikely to pivot into riskier asset classes. Nor do we think the cash will pivot into bank deposits, even as banks raise their deposit betas. Banks still do not want non-operational institutional deposits on their balance sheets."
It adds, "Institutional MMF AUMs currently make up about 65%, or $3.8tn, of total taxable MMF AUMs. Retail MMFs make up the remainder, and while they are more sensitive to cash reallocations, the outlook for interest rates does not suggest a large shift into fixed income next year. Indeed, even when the Fed begins to cut rates, the yield spread between cash and bonds is expected to remain negative for the better part of next year, suggesting little incentive to immediately extend out the curve. Furthermore, allocations to MMFs as a percentage of the overall mutual fund industry does not seem outsized as we saw in 2009-2012, when MMF allocations made up 30-40% of mutual fund assets, versus 15% today, which suggests the likelihood of mean reversion is low."
Finally, JPM writes, "Overall, with the expectation that the Fed is going to stay higher for longer and with MMFs yielding above 5% for same day liquidity, MMFs remain compelling both as a liquidity product and as an investment asset class. We do not anticipate the relative value of MMFs versus deposits, short-term bond funds, equities, etc. to change dramatically in the near future. While there might be some rotation out the curve, we suspect the magnitude will not be as meaningful as the inflows we saw this year. All told, elevated MMF AUMs appear here to stay."
