Like Taylor Swift, money-market funds keep breaking records in 2023

“Retail flows have fueled the asset growth in this cycle,” Cunningham said ahead of the Federal Reserve’s rate decision on Wednesday, when its policy rate is expected to remain unchanged at a 22-year high.

“Institutional flows will happen at the end of this year, and into 2024,” she said, should historical patterns in the half-century-old industry end up repeating.

That’s because institutions in Fed hiking cycles tend to buy Treasury bills and other cash-like investments directly from the source, she said. “It’s only when rates plateau, then stay there for a while, and then start to go down the other side, that you see institutional demand go into money-market funds,” she said.

“The reason for that is funds have a weighted average maturity that is 30, 40 or 50 days, so they lag the direct market, and keep rates higher for longer when interest rates are going down.”

Cunningham heads the roughly $530 billion cash management effort at Federated Hermes, a unique group that is both women-led and longstanding, with its leadership climbing the ranks of the firm through the 1980s and ’90s.

Paige Wilhelm heads prime liquidity for the group, while Susan Hill leads government liquidity and Mary Jo Ochson oversees tax-free liquidity investments and short-term municipal bonds.

Like others in the market, the Federated Hermes team is focused on the projected path of Fed rates down the road.

See: Why Fed’s response to this key question could spark 5% stock-market pullback or ‘solid rally’

“Our expectation is that this is much more of a normal cycle,” Cunningham said. “And that interest rates in the cycle don’t go back to zero.” Unlike much of the past 15 years, it also likely means investors keep a 5%-15% allocation to cash, rather than a minimal allocation because “it’s not hurting you that much,” she said, compared with periods when the Fed’s rate was stuck in an ultra-low pattern.

Money-market funds started seeing more inflows in mid-2022 when the Fed first began lifting its rate from a 0%-0.25% range. They shot higher this March after the collapse of Silicon Valley Bank, while hitting a record $6 trillion of assets (see chart) after July when the Fed bumped up its rate to a current 5.25%- 5.5% range.

While institutional assets tend to migrate into money-market funds when Fed rates start falling, other factors, including the typically strong year-end period for inflows and fears of uninsured bank deposits, could play prominent roles in the coming months, said Peter Crane, president and publisher of Crane Data and Money Fund Intelligence.

Stocks have mostly reversed the 2022 selloff in equities, with the S&P 500 index
SPX
up 16% through Wednesday, according to FactSet. Longer 10-year Treasury yields
BX:TMUBMUSD10Y
are back near the 16-year high at 4.33%, erasing earlier gains for the year from a total return perspective.

See: Cash can still earn 5%. Don’t fret another deluge of T-bill supply in the fourth quarter, Barclays says.