Please see the below daily update article from EPIC Investment Partners:
According to data from the Investment Company Institute, money market funds experienced an inflow of $11 billion during the week ending October 9, bringing the year-to-date total to over half a trillion dollars. Historically, during phases of monetary easing, money market funds have attracted substantial cash inflows due to their liquidity and perceived safety. As of October 9, 2024, total assets in money market funds reached $6.47 trillion, a new record.
The Federal Reserve’s September 2024 ‘dot plot’ projections indicate further reductions in the federal funds rate, with expectations for rates to decline to 3.4% by 2025 and 2.9% by 2026. With the Fed’s dual mandate now seemingly focused on employment, yesterday’s rise in initial jobless claims to 258,000—the highest in a year—will likely reinforce the rate cut agenda.
Almost unnoticed, bond funds have also begun to attract investor interest. Over the past 12 months, the Bloomberg Global Aggregate Index has risen by nearly 10%, easily surpassing returns on money market funds or cash. Historically, bond funds have shown notable gains during periods of declining interest rates. During previous rate-cutting cycles, such as those in 2001 and 2008, initial cash flows into money market funds were often followed by reallocations to bond funds as investors sought higher yields.
Money market funds often serve as an interim repository for liquidity injected by Federal Reserve easing measures. As conditions stabilise and uncertainty diminishes, investors typically shift from low-risk assets like money market funds to higher-return investments such as bond funds. Despite recent rate cuts, money market funds continue to offer yields superior to bank deposits due to slower rate adjustments. Additionally, the inverted yield curve, where short-term yields exceed long-term ones, supports the attractiveness of money market funds as a short-term option.
However, as rate cuts continue, bond funds are likely to become more attractive. Declining short rates generally lead to rising bond prices, enhancing potential returns. Investment-grade bonds, including government, corporate, and emerging market debt, are expected to offer higher yields than cash-equivalent instruments. Investors often focus too heavily on current yields, missing potential capital gains from bonds in a declining rate environment.
Drawing from recent cricket events, the record-breaking partnership between Harry Brook and Joe Root, which took England to 823 for seven declared, underscores the importance of timing. Just like the perfect brew of PG Tips, where timing is key to get the right flavour, investors must be mindful of when to transition from cash reserves in money market funds to bond funds. In cricket, hesitation can be the difference between scoring a boundary or losing a wicket. Similarly, investors must act decisively when transitioning from cash reserves in money market funds to bond funds. Hesitation could mean missing out on favourable conditions presented by declining interest rates.
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Andrew Lloyd
11/10/2024