Why Are US Money Fund Balances at 2008 Levels?

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Why Are US Money Fund Balances at 2008 Levels?

It’s month end, and that means it is time to look at money flows into money market and mutual/exchange traded funds. There’s a lot of ground to cover, so let’s get started.

#1: US money market fund inflows have gotten a lot of attention recently, and for good reason as these two charts show:

First, here is the total balance for retail money market funds through October 21st (latest data available):

Next, here is the total balance for institutional money market funds used by corporates and other large organizations:

Both charts tell the same story:

  • Balances have been rising all year. Retail has added $153 billion YTD and institutional balances are $269 billion since the start of the year.
  • Retail balances at $990 billion are now approaching the same levels as the Financial Crisis, when they topped out at just over $1 trillion. Institutional balances still have a ways to go before they hit their 2008 levels, however.
  • As for why money market fund balances are rising, opinions vary. Our explanation is that retail capital is slowly moving from banks to this market now that short-term rates are comfortably above zero. The alternative narrative is that investors are skittish about market conditions and prefer cash to longer-term investments.

Moving on to aggregate mutual and exchange traded flows into long-term assets like stocks, bonds and commodities:

  • Data from the Investment Company Institute for the month through October 23rd shows investors continue to sell equities and buy bonds.
  • Month-to-date outflows for stock funds total $16.4 billion, mostly ($12.9 billion) out of US equities although non-US equity redemptions were $3.6 billion. This is nothing new; 2019 has only had one month of equity fund inflows and it was small, just $2.2 billion in February.
  • Bond funds, by contrast, continue to see healthy inflows. October through the 23rd net purchases total $26.8 billion. As with equity flows, this continues a trend to month-in, month-out fresh money for the asset class.
  • Commodity inflows, mostly into precious metals, slowed in October. Through the first 3 weeks they only totaled $496 million versus +$2 billion/month in each of the last 4 months.

And finally, here is some data from just US listed ETFs. The data here is from www.xtf.com. We think of ETF flows as a proxy for where “fresh money” is going to work given investors’ long term tendency to sell mutual funds and buy these products to replace them in their portfolios:

  • October ETF inflows through yesterday total $30.9 billion, essentially on par with the 2019 YTD monthly average of $31.9 billion.
  • The asset class split for this month’s ETF flows: equities (43%) and fixed income (31%) dominate with other investment types (commodities, volatility, etc.) filling in the rest.
  • The oddest thing about equity flows this month is that investors shunned generic large/small cap stock exposure (outflows of $2.4 billion) and bought products with all-cap mandates often tilted to style dividend or minimum volatility (aggregate $14.6 billion of inflows).
  • In fixed income, ETF buyers shrugged off macro worries and bought as much high yield corporate bond products as investment grade at $2.4 billion each. Barbelling that, AAA sovereign debt ETFs saw $3.7 billion of inflows last month.
  • ETF buyers slowed their pace of commodity fund purchases last month, to $640 million from a 2019 monthly average of $986 million.

In conclusion, three takeaways:

  • Expect to hear a lot more about those rising money market fund balances in the weeks ahead. In our view this is not a “tell” about near term investor concerns, but rather a reach for safe yield. But neither is it a bullish indicator about “cash on the sidelines” – this capital is risk averse.
  • US equities remain reliant on corporate buybacks to create marginal demand for stocks. The ICI outflow data shows that clearly enough. Corporate profits are not quite as robust as last year, but we don’t expect companies to meaningfully reduce buybacks unless and until their view on forward year earnings comes down materially.
  • We’re through the customary October fiscal-year end for tax loss selling at mutual funds, and global equity markets sit at or near 1-year highs. Unless markets swoon in the next 8 weeks and cause end-of-year tax selling (as was the case in 2018), money flows should remain within their normal bands.