Money market mutual fund assets plunged in the latest week, falling $65.43 billion to $3.418 trillion, according to the Investment Company Institute's latest weekly series. Outflows totaled $118 billion over the past 3 weeks, the first significant downturn in assets since January 2007 and the first 3-week consecutive decline since early 2006. While this may signal that the largest cash buildup in history may be at an end, keep in mind the volatile nature of weekly money fund assets, the significant impact of tax-payment outflows and the seasonal effects of normal month-end related outflows on money fund asset totals.

Retail money market mutual fund assets, now 36% of the total, declined by $18.22 billion to $1.232 trillion, while Institutional money fund assets declined by $47.21 billion to $2.186 trillion. Taxable assets accounted for $12.53 billion of the Retail drop and $46.84 billion of the Institutional drop. Year-to-date, money fund assets have still increased by $273.7 billion, or 8.7%, and the rolling 52 week increase retreated back below the $1 trillion level (up $971 billion, or 39.7%).

We expect inflows into money funds to be large next week, though the days of gangbuster 40% growth indeed are likely history. The beginning of the month always brings strong fund inflows as dividends, bond coupons and new funding payments hit money market accounts.

The Federal Reserve's most recent quarter-point cut (to 2%) hadn't been announced in time to impact this week's flows, but this should push more institutional cash into money funds. However, as expectations spread that the Federal Reserve may be done with its latest series of rate cuts, the substantial rate advantage that money funds have held over direct money market instruments will soon vanish.

Though money funds hope that investors who came for the yield will stay for the safety and liquidity, and past history indicates that most of the money indeed will remain, they'll no longer have the massive tailwind of falling rates to drive assets. However, money funds should remain attractive due to a continued preoccupation with quality in a volatile marketplace, and due to funds' unblemished record of safety during the current liquidity squeeze.

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