Below, we excerpt from an article in the February issue of Crane Data's Money Fund Intelligence, entitled, "Will Rising Rates Bring Outflows to Institutional Money Market Funds?" This month's MFI says, "Though rising interest rates may not yet be imminent, some in the money fund community have begun to examine the impact that rising rates might have on the assets of institutional money market fund assets. Given the fact that money fund yields lag those of some shorter money market instruments, like overnight repo during rising rates (due to money funds' average maturity profile of about 45 days), some larger institutional investors, a.k.a. 'hot' money, have historically tended to take advantage of these lags."
MFI writes, "We decided to look back at the last 5, 10 and 20 years to see just how institutional assets appear to be impacted by rate moves. The answer appears to be that rate cuts have helped money funds tremendously, but flat rates, and rate hikes, have merely slowed or stalled asset increases." (The chart included in the issue show the Fed funds target rate since 1990 vs. assets in institutional money funds.) Note though that there are only three significant periods of rising rates -- Feb. 1994 through Feb. 1995, June 1999 through June 2000, and July 2004 through July 2006 -- over the past 20 years.
Tables included in the issue indicate that institutional money funds have averaged gains of 1.3% a month during the past 20 years, with jumps of 3.5% a month during falling rates, gains of 0.9% during flat rates, and gains of a mere 0.1% during rising rates. So, history shows that institutional money funds assets have actually risen during periods of rising rates, though barely. More recent views -- since 2000 and since 2005 -- show that money funds averaged gains of 3.9% and 3.6% a month, respectively, during rate cuts, averaged 0.4% and 0.8% a month, respectively, during flat rates, and averaged 0.4% and 0.5% a month, respectively, during rate hikes.
MFI explains, "Looking back at the three major rising rate periods mentioned above, we see institutional money fund assets effectively flat during the first period, rising from $222 billion in January 1994 to $226 billion in February 1995 (when Fed funds rose from 3%, where it had been flat for a record 16 months, to 6%). From June 1999 through June 2000, institutional money fund assets increased from $592 billion to $708 billion (while Fed funds went from 4.75% to 6.5%), and from July 2004 through July 2006 assets inched up from $1.109 trillion to $1.220 (with Fed funds rising steadily in quarter-point increments from 1.00% to 5.25%)."
Finally, the issue says, "But we've yet to experience sharp rate increases in the Fed funds rate with such a gigantic institutional asset base (now totaling $2.155 trillion). So of course it's possible we could see large outflows with rate hikes. But the history data argues that we'll see flat growth instead of a full flight.... [H]igher rates are eventually a positive for money funds, as higher dividends kick in and as the asset class becomes more attractive. Managers too will be thrilled with any move higher, so they can ease off on their deep fee waivers."
To request a copy of the full Money Fund Intelligence article or to see the data behind Crane Data's study, e-mail Pete Crane or call us at 1-508-439-4419.
