Cash is flowing out of money-market funds as interest rates on those accounts have tumbled with the Federal Reserve's series of interest-rate...
Cash is flowing out of money-market funds as interest rates on those accounts have tumbled with the Federal Reserve’s series of interest-rate cuts since September.
Early this year, investors exited stocks and flocked to the safety of money-market funds amid a credit crisis. The funds typically invest in short-term debt, so yields are tied to the federal funds rate.
The Fed has cut rates from 3.5 percent in late January to 2 percent in late April, halving yields on money-market funds to nearly 2 percent from 4 to 4.5 percent, says Matt Snowling, an analyst with Friedman, Billings, Ramsey.
Now money-market funds yield less than the rate of inflation, meaning on a real-dollar basis, customers are losing cash, Snowling says. That’s why they’re moving into higher-yielding but riskier investments, such as stocks and bonds.
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“Historically when there is a negative real rate of return, money flows out and into equities, real estate and commodities,” Snowling says. If interest rates remain low and inflation remains high, the outflows should grow, he adds.
In the first three months of the year, as cash was funneled into money-market accounts, the Standard & Poor’s 500 index tumbled 10 percent.
Since cash started flowing out in the second quarter, the S&P 500 has gained about 7 percent.