The growth of money market mutual funds since the US Federal Reserve first hiked rates in 2022 has be something to behold. Not as thrilling as Akira Kurasawa’s film Seven Samurai and John Sturges’ beloved adaptation, The Magnificent Seven, or as trendy as the ‘Mag 7’ tech behemoths. But with total US assets under management (AUM) again topping US$7tn, just as spectacular.
According to the Investment Company Institute (ICI), AUM in US products passed that mark in March for the first time since November of 2024. There are multiple reasons why they subsequently dipped and then rebounded. But we do not think it is substantially due to the up, then down again, trajectory of the stock market in roughly the same period. The argument that investors are placing cash in liquidity products to weather the equity and fixed-income storm is belied by the nature of the flows.
The argument that investors are placing cash in liquidity products to weather the equity and fixed-income storm is belied by the nature of the flows.
In March, when you might expect most investors would have been concerned that the tariff-influenced stock market correction might become a crash, institutions pulled their money from the relative safety of money funds. Some expected these sophisticated and active clients to run for cover to liquidity, yet they did the opposite. Many who did pull assets seemed – or actually revealed – that they were motivated by other reasons, and some of that money is likely to eventually return.
But didn’t retail clients invest more in March? Yes, but at a growth rate consistent with the extensive migration to money funds seen over the last several quarters. We can’t pinpoint from where those assets came. But the steady nature of the inflows supports the hypothesis that people are fed up with low interest rates of other products.
It’s not just US money funds. To our knowledge, assets in many non-money fund (rule 2a-7) products, such as investment pools and private funds, have risen; and the ICI reports that total global money fund AUM have also reached record highs. Cue the famous heroic Magnificent Seven theme.
He said what, now?
It’s hard to believe Fed Chair Jerome Powell uttered the term “transitory” at the March Federal Open Market Committee (FOMC) meeting. We thought that radioactive word was long buried after he repeatedly used it to describe pandemic-related inflation in 2021. His point was that the potential impacts of the Trump administration’s whipsaw approach to tariffs might be inflationary in the short term but not in the long term, as they might lead to better productivity. We aren’t so sure, and neither are some of his colleagues, including those who spoke after the meeting. Atlanta Fed President Raphael Bostic told Bloomberg, “I’m not going to say that word; nope.” And St. Louis Fed President Alberto Musalem said he was “wary” of presuming tariff pressure on prices would abate after a short-lived spike.
Besides keeping rates high, suggesting easing won’t arrive until the second half of this year and downgrading projections, the biggest decision the Committee made was to reduce of the monthly pace of quantitative easing from US$25bn to US$5bn. That will curtail US Treasury supply for cash managers, but not overly so. We are happy that the number of mortgage-backed securities rolling off the Fed balance sheet remained at US$35bn as the industry uses those securities as collateral in overnight repo transactions.
Powell was right about one point: policymakers’ decision to keep the target range at 4.25-4.5% – and their economic projections – were based on data that didn’t reflect the tariff turmoil. And even when data is incorporated, its impact will be messy and best ignored. Powell emphasised they will attempt to avoid making policy decisions due to “what-ifs”.
The volatility stemming from the trade war led to the longer end of the money market yield curve1, for spreads over US Treasuries, to vacillate as much as 30bps over March. That presented a great opportunity for yield pick-up.
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1 Securities maturing around one year in length
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