Money Market Mutual Funds Recover After Rate Hike, but Challenged by Short-Term Bank Investments

Strategic Insights -

The recent Federal Reserve Bank rate hike has boosted annual yields for money market mutual funds to 2.22%, a 335% increase from 1.51% one year ago, helping the asset class recover from the losses incurred during the series of interest rate cuts between 2002 and 2004. According to iMoneyNet, money funds lost $350 billion, or 15% of overall assets, to short-term bank investments during that period, which offered higher yields. However, despite the recent surge in money fund yields, short-term bank investments have captured $32 billion from money funds year to date, indicating a continued challenge for the asset class.

Key Takeaways:

  • The recent rate hike has increased annual yields for money market mutual funds to 2.22%, a 335% increase from 0.51% one year ago, according to iMoneyNet.
  • Between 2002 and 2004, money funds lost $350 billion, or 15% of overall assets, to short-term bank investments due to the Fed's series of interest rate cuts, which lowered overnight borrowing rates to 40-year lows.
  • Short-term bank investments have captured $32 billion from money funds year to date, despite the recent surge in money fund yields.
  • Officials at the Chicago Board of Trade's Federal Reserve Funds Futures Contracts believe money fund yields will reach 4% by year-end, which could help the asset class regain assets from competing bank investments.
  • The 20-year average annual money fund yield is 5.25%.
  • Futures contracts officials predict the Fed will raise rates after upcoming meetings on May 3 and June 30, which could further boost money fund yields.
  • Peter Crane, v.p. and managing editor at iMoneyNet, notes that historically, when rates have risen, money funds have had a significant advantage over bank products.
  • A similar pattern occurred between 1991 and 1993 when the Fed reduced short-term interest rates, hobbling money fund yields and creating a tide of assets flowing into short-term bank investments.

Statistics:

  • Annual yields for money market mutual funds have increased by 335% to 2.22% due to the recent rate hike.
  • Between 2002 and 2004, money funds lost $350 billion, or 15% of overall assets, to short-term bank investments.
  • Short-term bank investments have captured $32 billion from money funds year to date.
  • The 20-year average annual money fund yield is 5.25%.
  • The Chicago Board of Trade's Federal Reserve Funds Futures Contracts predicts money fund yields will reach 4% by year-end.

Sources:

  • iMoneyNet
  • Chicago Board of Trade's Federal Reserve Funds Futures Contracts
  • Peter Crane, v.p. and managing editor at iMoneyNet