Remember Money Market Funds?

bee

Investors in the U.S. money market are facing a grim year ahead. That’s the vision laid out by JPMorgan Chase & Co. strategists, who predict that the supply of investable assets will shrink by about $300 billion while the amount of cash chasing them has nearly doubled to $3 trillion. A key factor on the supply side is that the quantity of Treasury bills is poised to shrink as the U.S. government replaces with longer-term debt much of the short-term borrowing it undertook in 2020 to pay for fiscal stimulus.

U.S. Money-Market Investors Face Multiple Grim Trends in 2021

hank

Thanks @bee I’m locked-out of this one as I read Bloomberg several times daily (for market data) and it’s all too easy to exceed their cap on free access to stories. But, it’s an intriguing question nonetheless. Sure I remember them.

In around 1975-80 with double-digest inflation soaring and bank rates to savers paltry, average savers learned they could get extraordinarily high rates of return with MM funds. My first was from Deleware Investments - which no longer exists. 15-20% interest rates on short term savings in theses vehicles were prevalent and came with the “promise” (vs “guarantee”) of safety due to their $1 NAV. I even opened an account in one for my aging parents and gifted it to them. But, being children of the Great Depression, they quickly cashed it out and deposited the $$ in a local bank savings account - not trusting anyone from “out of town” to safeguard their money. (I could be wrong on this point ... but I think back than there were limits / controls set by government on the rates banks could pay savers.)


Low prevailing rates today plus tighter restrictions on how they invest have pretty much wrecked these once popular savings vehicles. There are repercussions still to be fully realized IMHO.

- Investors today are “reaching for yield” through less secure and more exotic cash substitutes.

- Investors are taking greater risks than they otherwise would in the equity arena.

- This has helped fuel a bubble in certain asset classes. Which ones is a matter of conjecture depending greatly on whom you ask and what their time horizon is.


Finally, early money market funds were to an extent precursors to the now widely diverse mutual fund offerings. To a degree, they helped break down public distrust / reticence towards riskier forms of investing (ie equity funds, precious metals, selling puts).

wxman123

Low interest rates are an unmitigated disaster for retirees. It is indeed causing a reach for yield that will probably not end well. I think like all cycles this will change, probably when few are looking. Now would be a good time. Here's to hoping for a 10 year above 1%.

BenWP

@hank: I seem to recall in the mid-80's that 14-15% interest rates on savings were offered at local Ann Arbor banks. I know we took advantage of them. OTOH, mortgage rates soared to 20+%, so who came out ahead in the Volker era?

catch22

Hi @BenWP
We played the MM game for about 1 year in the mid-80's. At the time, NY state had usury law limits of 12% for a personal loan/line of credit. We processed such a loan and invested the money in a MM account in Michigan. We didn't make a pile of money, but did make "free" money from the borrow rate and investment rate difference.......even after taxes on the income.
After this time frame, more or less; is also when credit card companies moved their operations to the Dakota's, etc. states where the charge/fee rates were not so restricted.

Side note: gonna be in your town today. Wishing circumstances (Covid) were different for a coffee visit, too.

Take care of you and yours,
Catch

BenWP

Thanks for the message, @catch22. Hope you enjoy your visit. Everyone is invited to my virtual party, with drinks on the house!