Investors pull out of money market funds

Falling profitsInvestors withdrew nearly $70 billion (€51 billion) from money market funds in the week ending October 16, the second-highest weekly redemption since data firm EPFR Global began measuring fund flows.

But with a deal on the US debt announced on 16 October, analysts say it is likely the next set of statistics will show money flowing back into money market funds.

Mike Krasner, managing editor at financial information company iMoneyNet, says “there is little doubt that the assets flowing out of the government funds was related to the Washington drama over the debt ceiling and the spectre of default.

“I would expect that a lot of the money that flowed out of these funds during the first half of the month will be returning to those funds now that the prospect of default – which I believe was never a legitimate possibility – is no longer hanging over investors.”

US equity funds did not suffer as badly as money market funds in the week leading to the debt deal and took in a net $10 billion, according to EPFR Global. Meanwhile, a net $3.25 billion was withdrawn from bond funds in the week.

The US debt deal has brought “relief” to the markets, says Chris Iggo, chief investment officer, fixed income, Axa Investment Managers.

“Returns for the rest of the year are likely to be stable and it won’t after all look like such a bad year, given the supposed great rotation and the move to higher rates. A stress free last couple of months of 2013 would be very welcome by all.”

However, Iggo notes that the US economy still has a current account deficit of about $100 billion a quarter, which presents severe structural challenges in future.

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