Flight to safety: Money market funds see 5,998 per cent inflow in first quarter
Money market funds and short term money market products have seen a staggering 5,988 per cent increase in net flows in the first quarter, according to data from Hargreaves Lansdown
Money market funds invest in high-quality, short-term debt, and they generally offer slightly higher returns than bank deposits.
As interest rates have risen at their fastest pace in 40 years, money market funds have become more attractive to many investors than bank deposits.
Robert Farago, Hargreaves Lansdown’s head of strategic allocation, pointed out that “the rates offered to savers become more sensitive to the central bank rate as they go up”. In other words, the higher the interest rate, the greater the response from customers as there will be more options available.
Improved technology also helps funds to move around more quickly than they have previously done. Farago noted individuals are more able to “compare rates across the market and to move their money to take advantage of the better deals on offer.”
Aside from the greater rewards on offer, Hargreaves Lansdown’s Danny Cox said the inflow reflected “the nervousness of committing to stock market funds and shares right now.”
“Over time as investor confidence improves we would expect to see people taking a longer term view and shifting across to the stock market,” Cox continued.
However, recent banking volatility was unlikely to have been a big factor in driving flows into money market funds, with Farago pointing out that “no depositor has lost any money” in recent collapses.
The data shows that the UK is experiencing the same kind of inflows into money market funds as the US since the vast majority of Hargreaves Lansdown’s clients are based in the UK.
According to Barclays, more and more funds are likely to flow into low risk money market funds over the coming year. They predicted $1.5trn would pour into mutual funds in the remainder of 2023.
This could potentially pose a risk to banks as much of the funds are likely to come from deposits. Deposits are banks cheapest source of lending so outflows may end up constraining lending.
Ahead of major US banks issuing first quarter results on Friday, analysts are predicting that they could see $100bn from some of the US’s largest lenders.