Fed Rate Cut May Drive Investors Away From Money Markets, Says Portfolio Manager

The Federal Reserve’s decision cut interest rates by 0.5% on Wednesday may pull investors away from money market funds and into longer duration bonds, according to a portfolio manager.

Total money market fund assets decreased by $20.02 billion to $6.30 trillion for a week ending on Wednesday, Sept. 18, the Investment Company Institute said. Among taxable money market funds, government funds decreased by $18.82 billion and prime funds decreased by $2.42 billion. 

“Historically, we’ve seen more assets move into longer duration bonds when yields have fallen, and I think we’ve already seen some of that happen this year,” said Timothy Ng, a fixed-income portfolio manager with Capital Group.

“I expect this trend to continue as the Fed continues to cut rates,” he said.

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“I think some of that flow will go into both equities and bonds, but in terms of relative scale, it will likely depend on the outlook for the economy, valuations and market sentiment between the two asset classes.”

A lot of assets moved into the money markets in recent years because money market yields were very attractive, but that may no longer be the case as the Fed plans to make further rate cuts this year, he said.

“Now you’re not getting as much yield waiting around, and you run the risk of missing out on capital appreciation that comes with having more duration in your portfolio as yields fall,” he said.

Price Action: Exchange-traded funds that hold money market funds gained slightly into Friday’s late-afternoon trading.

• iShares Short Treasury Bond ETF SHV gained 0.05%
• BlackRock Short Maturity Bond ETF NEAR rose 0.06%
• SPDR Bloomberg Barclays 1-3 Month T-Bill ETF BIL went up 0.044%
• Invesco Ultra Short Duration ETF GSY picked up 0.07%

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