Investors Shift to Money Market Funds

By Harry Robertson

LONDON (Reuters) – Investors poured $37 billion into cash-like money market funds (MMFs) in the week to Wednesday, Bank of America stated on Friday, as they prepared for potential U.S. Federal Reserve interest rate cuts in September.

This trend positions MMFs for their largest three-week cumulative inflow since January at $145 billion, according to financial data provider EPFR.

In addition, investors allocated $20.4 billion into stocks, $15.1 billion into bonds, and $1.1 billion into gold, as reported in BofA’s weekly market flow roundup.

Many fund managers anticipate that potential rate cuts could diminish MMF returns, sparking a trend of moving cash into stocks and bonds. However, larger investors often gravitate toward money market funds prior to rate reductions, as MMFs frequently yield higher returns compared to short-term Treasury bills due to the diverse short-term fixed income securities they encompass.

BofA strategists led by Jared Woodard noted that rate cuts are unlikely to significantly drive equity buying from the $6.2 trillion money market fund sector. They indicated that historical patterns show that the initial Fed rate cut usually results in more cash inflows during a ‘soft’ landing, with bonds emerging as potential winners in the case of a ‘hard’ landing.

Recent economic data suggests a gradual economic slowdown, described as a ‘soft landing’ rather than a severe downturn.

According to BofA and EPFR’s findings, investment-grade bonds marked their 43rd consecutive week of inflows, amounting to $8.1 billion. Meanwhile, emerging market equities saw an inflow of $4.7 billion, continuing their streak to 12 weeks, the longest since February 2024.