Rushing to Catch the High-Interest Last Train... Large Sums Flowing into MMFs

MMF Balance Approaches $6 Trillion, Reaching All-Time High

Investment in U.S. money market funds (MMFs) has surged to an all-time high. This is attributed to the anticipation of the end of the Federal Reserve's (Fed) tightening cycle and expectations of early interest rate cuts, driving demand seeking returns from high interest rates.

On the 7th (local time), Bloomberg News reported, citing data from the Investment Company Institute (ICI), that $61.7 billion in new funds flowed into MMFs during the week ending the previous day. As a result, total MMF assets reached $5.898 trillion (approximately 7,712.2 trillion KRW), approaching $6 trillion. This surpassed the previous record high of $5.836 trillion set the week before.

[Image source=AFP Yonhap News]

During this period, government MMFs, which invest only in virtually risk-free products such as government bonds and repurchase agreements (RPs), increased by $56.1 billion, while MMFs investing in relatively higher-risk assets like commercial paper grew by $6.1 billion. As the tightening cycle nears its end, MMFs offering yields comparable to deposit rates have gained popularity, with funds flowing particularly into the safer government MMFs.

Since the Fed embarked on an aggressive tightening cycle last year, global investors have poured money into MMFs. The inflow into MMFs became pronounced from early this year, and following the March collapse of Silicon Valley Bank (SVB), investors withdrawing funds from banks accelerated inflows, continuously increasing MMF balances.

The market expects the Federal Open Market Committee (FOMC) meeting on the 12th-13th to result in a rate hold. Interest rate cuts are anticipated next year. On the 14th, the European Central Bank (ECB) and the Bank of England (BOE) are also expected to keep their benchmark rates unchanged at their monetary policy meetings. Inflation, which surged to around 10% last summer, has recently fallen to the low 3% range, and with labor market overheating easing, these expectations have strengthened. The anticipated timing for rate cuts, originally set for the second half of next year, has been moved up to March, with the number of expected cuts increasing by up to five.

On the other hand, there are voices cautioning against excessive optimism regarding the end of tightening and rate cuts. Although disinflation is becoming evident, inflation remains above policy targets. For monetary authorities to shift policy, employment indicators would need to deteriorate significantly enough to offset inflation targets, or there would need to be fluctuations such as an economic contraction beyond a typical slowdown.