Both government and prime institutional money market funds have been steadily rising over the last several weeks, according to the Investment Company Institute. Analysts say this is due to changes in investor attitudes about the funds and the investment environment in general. The flows also are still very limited.
“Investors are slowly getting more comfortable with the funds,” says Greg Fayvilevich, Senior Director at Fitch Ratings. “It’s kind of the virtuous cycle effect. They see others going in [to MMFs] and follow.” He adds that fund managers have also done a good job in keeping the funds stable and communicating that to investors.
But this doesn’t mean that money market funds are heading back to their salad days. That’s because other vehicles have been attracting cash, including separately managed accounts, bank deposits, insured deposit accounts and ultra-short bond funds. This is reflected in the current numbers, which show a reversal of fortune for prime funds. According to ICI, total money market fund assets are sitting at $2.69 trillion for the week ended August 9, with government funds at $2.13 trillion and prime funds at $430 billion. Back in 2008 around this time, the ICI was showing assets under management at $3.58 trillion (just before the Lehman bankruptcy and the run on MMFs) with $2.18 trillion in prime MMFs, $890 billion in government only funds.
Nonetheless, in a time when yield is scarce, companies are seeing the attractive yield opportunity in the spread between prime and governments. And that gap between the two has been widening, Mr. Fayvilevich notes, widening to more than 0.35%, which is significantly higher than the post-crisis average of 0.09%.
Investors are also getting more confident and getting back to cash bucketing, trusting some of their cash to MMFs. “We’re 10 or so months into MMF reform so this has given investors a good chance to see how they behave,” says Mr. Fayvilevich. And they’ve been very stable, according to Fitch. In a recent note, Fitch says that since MMF reform, “95% of observations in daily changes in institutional prime fund NAVs have shown no movement. 5% of observations showed that NAV moved up or down by 1 basis point and in almost no instances NAV moved by 2 basis points or more in one day.”