[Asia Economy Reporter Jeong Hyunjin] "As risk aversion intensifies, global investment funds are flocking to money market funds (MMFs) with high safety."
On the 24th, Japan's Nihon Keizai Shimbun reported this citing the US market research firm EPFR. In Korea, corporations securing short-term liquidity have been consecutively redeeming MMFs, causing capital outflows, prompting financial authorities to urge maintaining the scale of MMF operations. In contrast, in the US, MMFs have been gaining greater popularity compared to other funds since July this year.
How much capital has poured into the US MMF market to prompt such reports? According to the report, net inflows into US MMFs increased by $257 billion (approximately 344.3 trillion KRW) from July to the 16th of this month in the second half of the year. During the same period, equity funds saw inflows of $36.4 billion, while bond funds experienced outflows. Nihon Keizai explains that MMFs, which are safer than other fund products in the second half, are gaining popularity.
Especially notable is the growth of individual MMFs. According to the Investment Company Institute (ICI), the total net assets of US MMFs stood at $4.6246 trillion as of the 16th, marking a 2% increase since July. Among these, individual MMFs recorded a 10% growth rate. In Korea, individual MMFs have seen continued capital outflows, with the amount of individual MMF subscriptions as of the 28th of last month hitting the lowest level since the Korea Financial Investment Association began compiling statistics in 2006.
The reason for the popularity of US MMFs, as explained by Nihon Keizai, is their yield. The average yield of major US MMFs rose from 0.02% at the end of February to recently 3.5%. This increase followed the US Federal Reserve raising rates from zero in March to 3.75-4%. Peter Crane, president of Crane Data, a US market research firm specializing in MMFs, stated, "Because deposit rates at banks and securities firms remain low, funds are flowing into MMFs."
In Korea, although MMF yields are around 0%, the rise in benchmark interest rates has pushed commercial bank deposit rates up to 3-4%, leading to capital outflows from the MMF market. Financial authorities have even urged banks to restrain from raising deposit rates.
Consequently, deposit balance flows differ between the US and Korea. According to Nihon Keizai, total deposits at US commercial banks stood at $17.8 trillion at the end of October, decreasing over three months by about $330 billion. In Korea, the fixed deposit balances at the five major commercial banks increased by more than 47 trillion KRW last month.
The Legoland incident in Gangwon Province also impacted the contraction of the domestic MMF market. Due to the Legoland incident, distrust in commercial paper (CP) intensified, triggering large-scale redemptions in short-term bond investment funds, shaking the MMF market, a major player in the short-term funds market. Corporations rushed to withdraw funds from MMFs to secure liquidity.
Nihon Keizai, referring to the US situation, stated, "Concentration of funds in MMFs poses a risk of destabilizing the financial system," adding, "Unlike MMFs whose balances are increasing, if bank funds decrease, the short-term financial market involving banks may face difficulties, potentially causing interest rates to surge."
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