Money market funds sometimes get a bad rap – they can be viewed as boring. Across the whole investment universe, investors have a vast array of choices: any number of asset classes that seek to balance risk with reward and offer the potential for higher returns. All money markets aim to do is provide a safe and protective home for short-term cash.
Yet amid unprecedented market volatility this month – that saw equity markets collapse and US Treasury yields soar following the announcement of sweeping US tariffs – the appeal of liquidity products has only increased. Around the world, money market funds, whether sterling, euro or dollar-denominated, have attracted sizeable inflows, pulling in US$30.3bn in the first week of April after US President Donald Trump announced sweeping tariffs1.
The dramatic shift in the market backdrop suggests that uncertainty and instability are here to stay. The Trump administration may have announced a 90-day pause on additional tariffs, but trade negotiations between the US and many countries are just beginning; and the tit-for-tat escalation in tensions between the US and China threatens to have widespread implications. The US dollar has slumped to multi-year lows.
Amid this ongoing tumult, money-market funds – which above all else seek to preserve capital and maintain daily liquidity, while offering a competitive yield – have never looked so good.
Central bank cuts
The likely central bank response to the market mayhem this year will be rate cuts. The Bank of England (BoE) cut its benchmark rate by 25bps to 4.5% in February and, at the time of writing, markets have priced in further cuts of around 75bps by the end the year (see Figure 1).
Figure 1: Implied overnight rate and number of forecast BoE hikes/cuts
The next BoE Monetary Policy Committee (MPC) is scheduled for 8 May and the overwhelming expectation from investors is that there will be a 25bps cut. However, the macroeconomic backdrop in the UK remains challenging. The trade war sparked by Trump’s tariffs will likely further dampen UK growth prospects this year2. However the UK’s long-term borrowing costs soared to their highest level in 27 years this week as gilts were swept up in the global bond market sell-off3.
The BoE expects the economy to grow 0.75% – half its November forecast of 1.5% – and for inflation to rise this year before falling back (UK inflation fell to 2.8% in February). It is global concerns – rather than domestic drivers – that underpin the central bank’s easing policy.
The European Central Bank is also widely expected to cut rates at its next meeting on April 17 and again in June. The bloc – which has a €198.2bn trade surplus with the US – is expected to face ongoing hostility from the Trump administration over its over its trading relationship.
Navigating uncertainty
The prospect of rate cuts typically encourages investors to extend duration and seek higher-yielding debt further out the yield curve. But the heightened backdrop of uncertainty and volatility at the present time may encourage many liquidity strategies to keep weighted average maturities relatively short.
The primary objective of any money market fund is capital preservation
The primary objective of any money market fund is capital preservation: investing in a diversified pool of highly-rated, short-term debt securities in order to achieve a competitive rate of return – no matter how volatile the underlying markets are.
In a falling rate environment, money market funds can potentially offer additional benefits, providing ‘carry’ on higher rates (compared to sovereign debt, for example) while at the same time also providing daily liquidity – allowing investors ‘same day’ access all their cash.
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