Investors are pouring billions into cash-like money market funds (MMFs) in anticipation of an upcoming interest rate cut by the U.S. Federal Reserve. According to Bank of America, $37 billion flowed into MMFs in the week leading up to Wednesday, marking the largest weekly inflow since January.
This trend reflects investors’ belief that a rate cut will lower the returns on MMFs, prompting a shift of funds into stocks and bonds. However, many fund managers anticipate a surge in investment flows into equities and bonds once the Fed actually cuts rates.
Interestingly, large investors often gravitate towards MMFs before rate cuts due to the higher returns they offer compared to short-term Treasury bills.
BofA strategists cautioned that a rate cut may not necessarily trigger a significant increase in equity buying from MMFs. Historical data suggests that the first rate cut often precedes larger cash inflows, and bonds are more likely to benefit from a “soft landing” scenario.
Recent economic data has generally indicated a gradual economic slowdown, supporting the notion of a soft landing. This trend has contributed to a consistent inflow of funds into investment-grade bonds, which have now seen 43 consecutive weeks of positive inflows.
Emerging market equities have also been attracting investor interest, receiving $4.7 billion in inflows for the twelfth straight week. This marks the longest streak since February 2024.
Key Takeaways for Traders
- MMFs’ Attraction: The continued influx into money market funds highlights a defensive strategy ahead of potential Fed rate cuts. Investors are hedging their bets by parking capital in cash-like assets that still offer relatively attractive yields.
- Equity and Bond Market Dynamics: Despite the heavy inflows into MMFs, investors are not ignoring equities and bonds. The hope is that when the Fed begins its easing cycle, some of this sidelined capital may flow into riskier assets, potentially boosting returns in both stocks and bonds.
- Soft vs. Hard Landing: The economic data suggests a tilt towards a soft landing, favoring bonds over equities in the near term. However, the transition remains delicate, and any surprise economic downturn could shift market sentiment sharply.
