Investors fled into money market funds in an attempt to shelter from the turmoil that has sent prices on bonds, loans and equities plummeting in recent weeks.
US money market funds — which are almost equivalent to holding cash because they invest only in super-safe short-term debt — took in $8.5bn for the week ending January 2, according to data from the Investment Company Institute.
That takes the total to $175bn over nine straight weeks of inflows — the longest such streak since October 2008 at the peak of the financial crisis, when the US Treasury introduced emergency measures to insure money market fund investors against losses.
The soaring interest in money market funds reflects investors’ retreat from more risky assets.
In the past week, investors withdrew $6.5bn from US equity funds — a fourth straight week of outflows — and $4bn and $3.4bn from US high-yield bond and loan funds, respectively, according to EPFR Global, another data provider
Prices across the different asset classes tumbled in the final weeks of 2018, as concerns about slowing growth, unresolved trade disputes and higher interest rates mounted. The S&P 500 has fallen more than 11 per cent since the end of November, notching another 2.5 per cent downturn on Thursday.
Aside from the flight to safety, investors pointed to the increased yield on offer from money market funds as another reason for the inflows. A total of four interest rate increases from the Federal Reserve in 2018 helped drive short-dated interest rates higher, increasing the returns — and appeal — of safer assets.
Money market funds invest in very short-dated assets and tend to split into two broad categories: government money market funds that can only invest in sovereign debt, and prime funds that can also invest in high-quality corporate debt, paying a slightly higher return for the modestly increased risk.
“The volatile markets and the high yields are drawing investor money into money market funds,” said Peter Crane, publisher of Crane Data.
Increased supply of short-dated US government debt to fund increased government spending, at a time when the Fed is no longer buying such debt, has also contributed to higher short-dated interest rates.
The average yield across the largest 100 money market funds now stands at 2.36 per cent, up from just 1.12 per cent at the end of 2017, according to Crane Data.
By comparison, a typical deposit account at a US bank currently offers an interest rate of just 6 basis points.
“There is temporary cash looking for a secure hiding place to sit out the market volatility but I also think a substantial portion of it is coming from products that are not providing such high returns, like bank deposits,” said Debbie Cunningham, chief investment officer for global money markets at Federated, which runs some of the largest money market funds.
