Money fund assets skyrocketed in the latest week, reaching their highest level since August 2009, after a mysterious plunge last week. Assets had suffered just their second decline over the past 13 weeks the previous week, but they've resumed their winning streak this week with their 28th gain out of the past 32 weeks. ICI's latest "Money Market Fund Assets" report shows that MMF totals have increased by $529 billion, or 17.4%, year-to-date in 2019. Over the past 52 weeks, ICI's money fund asset series has increased by $633 billion, or 21.5%, with Retail MMFs rising by $226 billion (20.2%) and Inst MMFs rising by $407 billion (22.3%).
ICI writes, "Total money market fund assets increased by $50.43 billion to $3.58 trillion for the six-day period ended Tuesday, November 26, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $48.16 billion and prime funds increased by $2.52 billion. Tax-exempt money market funds decreased by $246 million." ICI's weekly series shows Institutional MMFs falling $34.0 billion and Retail MMFs decreasing $11.9 billion. Total Government MMF assets, including Treasury funds, were $2.662 trillion (74.4% of all money funds), while Total Prime MMFs were $775.9 billion (21.7%). Tax Exempt MMFs totaled $138.5 billion, 3.9%.
They explain, "Assets of retail money market funds increased by $3.55 billion to $1.35 trillion. Among retail funds, government money market fund assets increased by $2.29 billion to $761.07 billion, prime money market fund assets increased by $1.49 billion to $458.97 billion, and tax-exempt fund assets decreased by $228 million to $125.48 billion." Retail assets account for over a third of total assets, or 37.6%, and Government Retail assets make up 56.6% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $46.89 billion to $2.23 trillion. Among institutional funds, government money market fund assets increased by $45.87 billion to $1.90 trillion, prime money market fund assets increased by $1.03 billion to $316.88 billion, and tax-exempt fund assets decreased by $19 million to $13.03 billion." Institutional assets accounted for 62.4% of all MMF assets, with Government Institutional assets making up 85.2% of all Institutional MMF totals.
Crane Data's separate Money Fund Intelligence Daily series shows overall money fund assets up $80.7 billion month-to-date (through 11/26) to $3.925 trillion. (We're projecting that this series will break the $4.0 trillion level by the end of this year!) Prime MMF assets are up $41.1B MTD, while Government assets are up $35.9B.
In related news, JPM Securities discusses money fund asset flows in their new "Short-Term Fixed Income 2020 Outlook." Under the headline, "Will MMFs lose steam in 2020?" They write, "Money market funds have had a phenomenal year. Through November 21, total taxable money fund balances grew $536bn (+19%) and now total more than $3.38tn. Even accounting for seasonality, this year's inflows were substantially higher than those of prior years.... In the face of an inverted yield curve and volatile equity markets, MMFs provided a safe haven for investors seeking stability and yield. Perhaps more importantly, MMFs continued to offer better yields relative to bank deposits. So it was not surprising then that flows have been fairly widespread, with significant gains across different types of taxable MMFs.... And along with the increase in AUM, the demand for Treasuries, Agencies, repo and bank CP/CD increased significantly as well."
JPM comments, "Notably, cash continued to pile into MMFs even as the Fed eased interest rates this year, refuting the notion that lower rates would prompt imminent outflows. In fact, we find that MMFs historically have not experienced outflows until 1-2 years after the Fed cut rates.... Intuitively, this may be a reflection of investors' increased risk aversion as they seek more safety to combat the riskier environment that prompted the Fed to cut in the first place. That said, as we are now four months past the first rate cut, and with a Fed that has signaled an intent to remain on hold, it's worth asking: could we see outflows next year?"
They explain, "In part, we suspect MMF balances will depend on how the curve evolves next year. Assuming the Fed cuts one more time next year, our Treasury strategists now expect 2y-, 5y-, and 10y Treasuries to be at 1.50%, 1.55%, and 1.85% by 2Q20 respectively, not too far off from current levels. With Treasuries somewhat range-bound, spreads are likely to play a more dominant role in total returns as opposed to the decline in rates. Yet, with yields relatively flat in the front end, and credit spreads already tight, we see little economic incentive for investors to increase duration risk. As a result, we may continue to see new cash flow into the money markets. Notwithstanding the recent repo turmoil and Fed intervention in the T-bill market, the stability of MMFs may continue to attract incremental cash."
The Outlook adds, "Furthermore, in spite of Fed rate cuts, the relative attractiveness between bank deposits and MMFs continues to favor the latter asset class.... [T]he spread between bank deposits and MMFs remains wide, with MMFs yielding 100-125bp above bank deposits. With a Fed either on hold, or perhaps deploying another 25bp insurance ease in 2Q20, we suspect banks are not going to be increasing their deposit yields anytime soon. While dynamics in the money markets could push MMF yields incrementally lower, particularly with respect to government MMFs, we suspect the spread over deposits will remain large enough for MMFs to continue to attract cash on the margin. All told, we do not foresee outsized flows out of MMFs next year. While the degree to which cash moved into MMFs may abate, the combination of a flat front-end yield curve and low deposit rates should keep balances relatively elevated. This means steady demand for money market instruments."
Finally, on supply, J.P. Morgan says, "Growth in money market supply balances should moderate next year. In aggregate we project total money market supply (excluding Fed ON RRP) will increase $345bn year over year, as Treasury bills will no longer provide a positive source of investable assets next year.... We estimate credit supply (total ex-Treasuries) balances will increase by $243bn, driven by modest increases across a range of credit products in the money markets."
