The Investment Company Institute released its "2012 Investment Company Fact Book" this week, ahead of its annual General Membership Meeting conference. The Fact Book says, "Money market funds continued to experience outflows in 2011 (Figure 2.13), but at a much reduced pace from the outflows seen in 2009 and 2010. Outflows in 2009 and 2010 were in part driven by an unwinding of the flight to safety in response to the financial crisis of 2007 and 2008. This effect likely waned in 2011, but other factors continued to limit inflows to money market funds: the low short-term interest rate environment, the European debt crisis, the potential for a default by the U.S. federal government, and the U.S. federal government's extension of unlimited deposit insurance on non-interest-bearing checking accounts."

It explains, "Owing to Federal Reserve monetary policy, short-term interest rates continued to remain near zero in 2011. Yields on money market funds, which track short-term open market instruments such as Treasury bills, also hovered near zero, and were a bit below yields on money market deposit accounts offered by banks (Figure 2.14). Individual investors tend to withdraw cash from money market funds when the difference in interest rates between bank deposits and money market funds narrows or becomes negative. Retail money market funds, which are principally sold to individual investors, saw a $4 billion outflow in 2011, following outflows of $309 billion in 2009 and $125 billion in 2010 (Figure 2.13). The reduced outflow from money market funds in 2011 likely reflected at least two factors that offset, in part, the effect of the low-yield environment. First, the stock market declined markedly from April through early October and during this time investors may have parked cash in money market funds as a safe haven. Second, following regulatory changes, many banks reportedly altered checking account arrangements, which may have resulted in higher fees to certain deposit accounts, thus reducing their competitiveness relative to money market funds."

ICI writes, "Institutional money market funds -- used by businesses, pension funds, state and local governments, and other large-account investors -- had outflows of $120 billion in 2011, following outflows of $230 billion in 2009 and $399 billion in 2010 (Figure 2.13). As with retail money market funds, this three-year pattern was heavily influenced by continued low interest rates and an unwinding of the flight to quality by these investors in 2007 and 2008. In 2011, flows to institutional money market funds were affected by two financial market shocks attributable in large measure to government gridlock: the looming U.S. federal debt ceiling crisis and deteriorating conditions in European debt markets. Reflecting concerns about solvency and liquidity in U.S. and European sovereign debt markets, investors withdrew $174 billion from institutional money market funds in June and July, more than the total for the entire year."

They continue, "In response to the eurozone debt crisis, prime money market funds markedly reduced their holdings of eurozone issuers in the second half of 2011 (Figure 2.15). Prime money market funds' holdings of eurozone issuers fell to 12 percent by year-end from 31 percent at the end of May. This pattern was not uniform across Europe, however, with prime money market funds' holdings of European issuers outside the eurozone ("Other European issuers") rising slightly to 23 percent at the end of December from 22 percent of assets at the end of May. (Denmark, Switzerland, Sweden, and the United Kingdom constitute the bulk of the "Other European issuers" category.)"

ICI adds, "U.S. nonfinancial businesses are important users of institutional money market funds. In 2011, U.S. nonfinancial businesses continued to reduce the portion of cash balances held in money market funds (Figure 2.16). This portion reached a peak of 36 percent in 2008 and fell to 19 percent by year-end 2011. In part, the decline in 2011 may have reflected cash managers' concerns regarding the U.S. federal debt ceiling crisis and developments in Europe. In addition, regulatory changes have enticed corporate cash away from money market funds toward bank deposits. Under provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, banks have been able to pay interest on business checking accounts and, through December 2012, can offer unlimited deposit insurance on non-interest-bearing business checking accounts."

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