Fed Rate Cuts to Spur $2 Trillion Money-Fund Exit, Apollo’s Slok Says

(Bloomberg) — The steady stampede into money-market funds is likely to reverse as the Federal Reserve keeps pushing down interest rates, giving investors incentive to shift cash into higher-yielding assets, according to Apollo Global Management’s chief economist Torsten Slok.

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“Where will the $2 trillion added to money market accounts go now that the Fed is cutting,” Slok wrote in a note to clients on Tuesday, citing the inflow to money-market funds since the Fed began raising rates in March 2022.

“The most likely scenario is that money will leave money market accounts and flow into higher-yielding assets such as credit, including investment grade private credit.”

Slok, who warned of a such an exodus earlier this year, has stuck to his call even after investors keep piling in. The assets of such funds swelled last week to $7 trillion for the first time ever, defying speculation that investors would pull out cash once the Fed started nudging interest rates down from a more than two-decade high.

The persistence of inflows even after the Fed cut rates at the last two meetings likely reflects the fact that money-market funds tend to be slower than banks in reducing the payouts to investors.

The seven-day yield on the Crane 100 Money Fund Index, which tracks the 100 largest funds, was 4.46% as of Nov. 18, just below the lower bound of the federal funds rate. The funds are also attractive to institutions and corporate treasurers, who tend to outsource cash management when rates are elevated rather than grapple with it themselves.