NYT: Why People Are Buying MMFs
The New York Times asks in a new article, "Interest Rates Are Falling. Why Are People Still Buying Money Market Funds?" They write, "Money market funds seem to be defying gravity. They are paying less in interest to investors, but becoming more popular. Given a choice, people usually want more for their money, not less. Yet since the Federal Reserve began pushing short-term interest rates down more than a year ago, investors have been funneling hundreds of billions of additional dollars into these funds." The piece says, "That may seem strange but there are good reasons for it. Thanks to a combination of convenience, good returns, and favorable comparisons with alternatives, money market funds are likely to continue attracting enormous wads of cash, even though the Fed announced on Wednesday that it was lowering short-term interest rates by a quarter of a percentage point. Big money market funds have been paying more than 4 percent annualized interest, according to Crane Data, an independent financial market research firm. Within the next several weeks, these funds are almost certain to offer about a quarter of a percentage point less. But Peter G. Crane, a founder of Crane Data, is quite confident that their appeal will be undiminished." They quote Crane, "I expect about $100 billion to pour into money market funds each month for the rest of the year.... The funds will probably reach $8 trillion in assets by the end of this calender year up from around $7.8 trillion now." The Times adds, "Basically, it’s because money market funds are still a good deal, even if they are no longer paying more than 5 percent interest, as many of the biggest funds did through much of last year.... In certain periods, money market funds have been an effective stand-in for investment-grade bonds and bond funds, especially if you were looking for a stable and safe place for holding cash. We are living through one of those periods.... The more extreme the stock market's valuations, the more comforting it is to own an ample stash of cash. Still-handsome money market rates make holding cash even sweeter."
