Maybe The $3 Trillion In Money Market Funds Is Being Spent



James Bianco has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors.

Prior to founding Bianco Research, Jim spent time in New York as Market Strategist for UBS Securities, and Equity Technical Analyst at First Boston and Shearson Lehman Brothers. He is a Chartered Market Technician (CMT) and a member of the Market Technicians Association (MTA).


Watch CNBC for 10 minutes and you will likely hear about the $3 trillion of money sitting in money market funds (actually $3.4 as the chart below shows) and how that money has to be spent. By this they mean investors are getting antsy about earning virtually 0% in money market funds as stocks soar and make them feel stupid. Never mind the fact that cash equivalents like 3-month Treasury bills have outperformed the S&P 500 since January 1997! The conclusion still stands that this money will come flying into stocks and propel them even higher.

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The recent data suggests this might be happening now. As the chart above shows, assets in money market funds have been falling over the last few months. Where is it going?

The next series of charts using data from the Investment Company Institute (ICI) may help answer this question. As the first chart below shows, money is not flowing into equity mutual funds as so many stock managers have been predicting. August flows (top panel in red) were a measly $3.86 billion. Over the last 12 months, equity mutual funds have seen a hefty $156 billion in outflows (bottom panel in blue).

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However, take a look at the flows into bond funds and the picture is completely different. Flows in August (top panel in blue) set a new record as $42.91 billion came flying into these funds. Over the last 12 months (bottom panel in red) bond funds have swelled by $156 billion, nearly a record for any one year period.

We first pointed this out last month and further detailed this in our Mutual Fund Flows earlier this week.

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Which Bond Funds?

If money is flying into bonds funds most probably think this means government bond funds. However, as the chart below shows, this is not the case. It details the flows into fixed income funds by major category. The number listed on the chart is the net new cash flow level for August.

Investment grade corporate bonds ($8.785 billion), Munis ($9.069 billion) and Strategic Income ($15.534 billion) account for the bulk of the flows.

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Looking at the categories the two that are booming, relative to their recent past, are corporate bonds and munis. This is unusual. When corporate bonds are seeing record inflows, high yield funds usually see huge inflows as well. This is not the case now. Likewise, when munis are seeing huge inflows, government funds usually follow suit. This is not the case either.

See the chart below which details the sub-categories of corporate bonds to explain why we are seeing such unusual flows. Of the record $8.785 billion inflow in corporate bond funds, a record $5.264 billion flowed into short-term corporate bonds. This pattern is also present in munis.

It appears that investors are moving their money from money market funds yielding virtually 0% to short-term muni and corporate funds that have a yield of between 1% and 2%.

So, for those that are calling for the exodus of cash from money market funds, it is already happening. This money is being moved into short-term corporate and muni funds in a reach for some yield. Stocks are being left out.

Are these investors making a mistake? Year-to-date, the BofA/Merrill 1-to-3 year Corporate Master Index is up 12.834%. Over the same period, the S&P 500 is up 18.35%. Stocks lost 37% last year and have returned nothing in the last 11 years. Investors that moved into short-term corporate funds are are seeing 13% YTD returns versus 18% in volatile stocks and are probably not losing sleep over this decision.

We do not expect this money to move toward stocks anytime in the next several quarters, and maybe even years.

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