The Investment Company Institute just released its "2011 Investment Company Fact Book," the organization's annual compilation of mutual fund statistics and information. The fact-filled 51st edition says on the "Demand for Money Market Funds," "Money market funds continued to experience substantial outflows in 2010. This trend likely reflects the search by investors for higher yields in an environment of low short-term interest rates accompanied by a steep yield curve and a continued unwinding of the flight to safety in response to the financial crisis of 2007 and 2008."
ICI's "Fact Book" comments, "Retail money market funds, which are principally sold to individual investors, saw a total outflow of $125 billion in 2010, following an outflow of $309 billion in 2009. Money market fund yields continued to follow the pattern of short-term interest rates in 2010, hovering between 0 and 25 basis points. In addition, yields on money market funds remained consistently below those on bank deposits for the past two years -- an unprecedented occurrence since the inception of money market funds in the early 1970s. In general, retail investors tend to withdraw cash from money market funds when the difference in interest rates between bank deposits and money market funds narrows. The sizable outflows from retail money market funds in 2009 and 2010 do not appear to be atypical considering the negative interest rate spread."
It continues, "Institutional money market funds -- used by businesses, pension funds, state and local governments, and other large-account investors -- had outflows of $399 billion in 2010, following outflows of $230 billion during the previous year. Outflows from institutional money market funds likely reflected the low interest rate environment and the continued unwinding of the flight to quality by these investors in 2007 and 2008."
ICI explains, "The tumult in financial markets around the world that started in August 2007 and continued through early 2009 led many institutional investors to seek the liquidity and safety of money market funds that invest primarily in U.S. government securities. These funds, which can invest in U.S. Treasury debt solely or a combination of U.S. Treasury debt and obligations of U.S. government agencies, received $881 billion in net new cash flow from institutional investors in 2007 and 2008. As financial markets stabilized in 2009 and 2010, institutional investors shifted away from U.S. government money market funds, withdrawing $537 billion, on net, from these funds over the past two years. Nevertheless, U.S. government money market funds comprised nearly 39 percent of institutional taxable money market assets at year-end 2010, up from only 24 percent at year-end 2006, prior to the start of the financial crisis."
Finally, the new "Fact Book" adds, "U.S. nonfinancial businesses continued to reduce their holdings of money market funds in 2010. During the financial crisis, corporate treasurers made extensive use of institutional money market funds; at year-end 2008, 36 percent of their short-term assets were in money market funds. By year-end 2010, nonfinancial businesses held 25 percent of their short-term assets in money market funds, back to approximately the same proportion measured at year-end 2006, prior to the start of the financial crisis."
