Large Sums Flock to High Interest Rates... MMF Expected to Attract $1.3 Trillion This Year

Rising US Treasury Yields Amid High-Intensity Tightening
MMF Returns Also Increase
Top 100 Funds Average Return at 5.19%
Highest Since 1999

As U.S. Treasury yields soar, approximately $1 trillion in funds have flowed into money market funds (MMFs) from the beginning of this year to the present. The surge in MMF yields due to the U.S. interest rate hikes has attracted capital seeking both returns and safety. With the possibility of an economic recession next year being raised, the money move phenomenon toward MMFs is expected to intensify further.

According to major foreign media on the 6th, the inflow of funds into MMFs from the beginning of this year to this month is estimated to reach $1 trillion. Expanding the period to cover the entire year, a total of $1.3 trillion in funds is expected to flow in. The money move phenomenon accelerated as investors seeking safe assets poured into MMFs following the financial crisis triggered by Silicon Valley Bank (SVB) in March. Although institutional investors withdrew more than $100 billion around mid-October this year, causing MMF balances to temporarily decline, $60 billion flowed back in early this month, increasing the balances again.

MMFs are representative safe assets that invest in low-risk short-term high-quality bonds. However, the status of MMFs has changed as U.S. Treasury yields surged due to aggressive tightening by the U.S. Federal Reserve. The Fed hinted at the possibility of further rate hikes amid persistent inflation, pushing the U.S. 10-year Treasury yield above the 5.0% mark for the first time in 16 years. Since MMF yields are linked to short-term bond rates, the rise in U.S. bond yields has led to a corresponding increase in MMF yields.

According to financial market data provider Crane Data, the average yield of the top 100 U.S. MMF funds is 5.19%, marking the highest level since 1999. In contrast, the average interest rate on U.S. savings accounts this month is only 0.6%. As investors flock to MMFs due to the high yields, the total assets under MMFs have grown to $5.6 trillion as of September, since the Fed began tightening in March last year.

Alongside MMFs, high-dividend stocks, which investors favor for dividends rather than stock price fluctuations, are also gaining popularity. This is analyzed as a move toward safe assets amid concerns about an economic recession and increased external uncertainties such as Middle East conflicts. More than half of the S&P 500 companies offered dividend yields higher than the 10-year U.S. Treasury yield, which is also cited as a factor for their popularity. Although the number of high-dividend stocks has decreased recently due to the sharp rise in long-term U.S. yields, companies like Coca-Cola, 3M, and Johnson & Johnson continued to pay high dividends last year.

Blair Shedo of US Bank commented, "As U.S. Treasury yields fluctuate wildly, the market is cautious about additional risks until interest rates find a new equilibrium."