Money market funds keep growing despite expected Fed cuts, JPMorgan strategists say

NEW YORK, Jan 25 – Assets in money market funds are rising to start the year, challenging some expectations that investors are set to pour cash on the sidelines into stocks and fixed income, JPMorgan strategists said on Thursday.

So far this year, taxable US money market fund (MMF) balances have increased by USD 75 billion, JPMorgan fixed income strategists led by Teresa Ho said in a note. By contrast, such funds have seen seasonal outflows at the start of the year in general over roughly the past decade, the strategists said.

The rise in assets is “challenging the view that the USD 6 trillion of cash sitting in MMFs will rotate into alternative assets such as fixed income and/or equities,” the strategists said in the note.

Last year, money market fund assets rose by over USD 1.1 trillion, or 22%, “one of the largest increases seen in the past decade,” JPMorgan said.

Some expect outflows this year, especially if the Federal Reserve delivers the rate cuts it has penciled in for 2024, pushing down yields and making the funds less attractive to investors.

However, in prior easing cycles, money market funds continued to see inflows even when the Fed began to cut rates, according to JPMorgan’s analysis of three such cycles since 1995.

“This makes sense, as MMF yields tend to lag yields of direct cash alternatives such as T-bills when the Fed starts to cut rates, thus attracting flows from other liquidity alternatives,” the strategists said in a note.

Further, the strategists said they believe much of the cash in money market funds is “core liquidity” among institutional and retail investors — used for cash management needs — as opposed to an investment asset class that is part of an investment portfolio.

“We think the amount of core cash in MMFs is around USD 5.5 trillion, which leaves about USD 500 billion susceptible to flight risk, particularly from retail investors,” according to the note.

Overall, the strategists said they think money market fund assets will remain elevated in 2024 and do not expect “meaningful” net outflows.

(Reporting by Lewis Krauskopf; editing by Diane Craft)