Sceptical investors race to safety of US money market funds

Written by The Financial Times | Updated: Dec 31 2011, 07:17am hrs
By Ajay Makan and Vivianne Rodrigues in New York

US money market funds are on course for some of their biggest inflows since the height of the financial crisis, in a sign that risk-averse investors are seeking safe haven in US Treasuries.

The funds took in $54.9bn in November and another $36.8bn by December 21, according to data from Lipper, the funds research company. That is the largest two-month inflow since December 2008 and January 2009, when $195bn was invested.

The flight to safety has coincided with a mini-recovery in the equity markets, with the S&P 500 rising 14.5 per cent since October 3. The positive signals from equity markets have been based on light trading volumes and low participation, said Matthew Lemieux, an analyst at Lipper. I dont want to say the rally is a mirage, but the money market flows show that many investors remain very sceptical even as markets recover. The flows are consistent with general risk aversion and a fear of exposure to non-US credit risk, added Joseph Abate, money market strategist at Barclays Capital.

Money market funds invest in highly liquid securities such as US Treasuries and short-term debt issued by financial institutions. The sector is used by institutional investors to park cash not invested elsewhere. The funds are attractive to investors because they rarely lose money, although a number of funds broke the buck and incurred losses during the financial crisis.

Money market funds have since struggled as the Securities and Exchange Commission imposed new regulations, Treasury yields hit record lows and investors grew nervous about funds lending to European banks. According to Lipper, $1.2tn has been withdrawn from the sector since February 2009.

Fitch, the rating agency, said nearly all of the November and December inflows have been into funds that invest exclusively in US government-backed securities. Those funds have had their assets under management rise more than 7 per cent since November, while so-called prime money market funds, which invest in commercial paper, have not recorded any inflows. Its a no brainer, said Channing Smith, who manages $1bn in assets at Tulsa-based Capital Advisors and recently put 18 per cent of his equity in a Treasuries fund. There are few inspiring investment opportunities out there right now.

The Financial Times Limited 2011