Federated Hermes' Money Market CIO Deborah Cunnigham writes, "Record high: Money market assets have reached a new mark," in her latest monthly commentary. She comments, "Records, as they say, are made to be broken. But some seem so out of reach we don't pay attention to them until they are nearly upon us.... That's the case with the record amount of money market fund assets under management reached in late November. That number? $7,000,000,000,000. Yes, the convention is to abbreviate it to $7 trillion, but spelling it out shows just how big that number is, and it's cause for celebration. The broader liquidity market (including products denominated in euros and pounds, pooled investments, private funds, and other forms) is also at an all-time high. In its conference in Pittsburgh last summer, Crane Data also wedded sports and money markets with a version of the Steelers terrible towel that touted how close the industry was to $7 trillion in assets. We might soon need a new one to wave."

Cunningham continues, "Of course, the tremendous inflows started when the Federal Reserve began hiking rates in March 2022 and continued as rates climbed through 3%, 4% and 5%. But this accomplishment is decades in the making. Federated Hermes history dates to 1974 when we launched the first mutual fund to use the term 'money market' in its name. From convincing investors of the value of 'money market funds' to battling regulators, steering past market upheavals, and navigating a zero-rate environment, we have championed them because we believe in their worth to clients as both a tool for cash management and as a critical part of portfolio allocation."

She explains, "But with the Fed cutting rates, surely the recent success is coming to an end, right? We don't think so. A hypothetical theme popular in the markets in the coming months might be that clients can hardly wait to transfer their 'sideline cash' to the stock and bond markets if yields dip much further. We believe that for most investors, cash is not coal waiting to be shoveled into a furnace to power riskier asset classes. Liquidity vehicles' utility as a mechanism to pay expenses with the potential for an attractive return and as a crucial part of a balanced portfolio will persist. If the Fed's terminal fed funds rate settles in the mid 3s (we now think 3.5% to 4% is possible) all segments of the market—government, prime and muni money funds especially -- should remain a robust asset class."

Finally, Cunningham says, "It is still too early to truly assess the ramifications on the liquidity markets of Trump's return to the White House. We don't invest based on rumor, speculation or promises. However, we continue to think many of his potential policies, especially on tariffs and immigration, could be inflationary. Those primarily impact the money markets through the Fed, which should be factored into its updated Summary of Economic Projections released after its meeting on Dec. 18."

She adds, "In fact, that document is probably more important than the Committee's decision to lower or maintain the target range -- at present a coinflip -- as we expect policymakers to adopt an every-other-meeting cut approach in 2025. A pause in December likely means a cut in January; a cut likely means a pause. If policymakers slow the pace of easing due to concerns about inflation stalling or trending back up, money markets likely will see yields stabilize at elevated levels."

In related news, Hong Kong-based publication The Asset features the article, "Money market funds, good bet under Trump 2.0." They tell us, "When massive uncertainty and volatility prevail in the financial markets as the US government transitions to the Trump administration, Asian investors who are seeking a relatively stable, low-risk, but well-performing asset class would do well to consider US dollar money market funds."

The piece quotes Aidan Shevlin, head of international liquidity fund management at J.P. Morgan Asset Management, "It's pretty attractive, and that's actually what we're seeing. If we look at money market funds in the ultra-short duration space at this point in time, maybe one year duration or a maximum of three-year final maturity, we're seeing a huge amount of money coming into these funds."

The Asset says, "For Asian investors, US money market funds present very attractive opportunities after years when they were earning 0% on their cash holdings. Also, the slowdown in the Asian market, and prevailing uncertainty and volatility makes investing in equities and bonds more challenging for more conservative and risk-averse investors."

Shevlin adds, "Asia does well in a scenario where China is growing strongly and where the Fed policy is loose; and, unfortunately, we're not in that situation right now. China's growth is weaker, and the Fed is keeping rates higher, and is likely to keep them higher than people initially expected. So, under these circumstances, it will be a tougher environment for Asia to do well in the coming times."

The article tells us, "On the bright side, the relatively high interest rates provide higher real yields on cash, which is an opportunity for more conservative investors who wish to avoid the uncertainty and volatility of other asset classes.... 'For investors who are more cautious,' Shevlin shares, 'the fact that we've got really high real yields on cash at this moment in time gives you a good place to hide out if you're getting 4% or 5% yield on your US dollars, Aussie dollars, and so forth.'"

It concludes, "US dollar money market funds can be a good investment when the US dollar is strengthening because this asset class can benefit from a more stable environment as it invests in low-risk instruments like US treasury bills, certificates of deposit and commercial paper. These instruments are less volatile and can provide a safe haven during economic uncertainty or fluctuations."

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