NEW YORK (AP) - Cash is starting to flow out of money market accounts as
interest rates on those accounts have tumbled along with the Federal Reserve
Board's recent spate of cuts.
Considered safe havens during the credit crisis and falling equities
markets, money market accounts are now providing little to no profit for
investors. These accounts typically invest in short-term debt, which rise and
fall with Federal Reserve interest rate changes.
With the Fed cutting rates from 3.5 percent in late January to 2 percent
Wednesday, rates on money market accounts have dropped from between 4 percent
and 4.5 percent to close to 2 percent, Matt Snowling, an analyst with Friedman,
Billings, Ramsey said.
The current rates now fall below inflation rates, meaning on a real-dollar
investment, customers are losing cash in money market accounts, Snowling said.
That has triggered the beginning of a move back to higher-yielding but riskier
investments, such as fixed income and equities.
"Historically when there is a negative real rate of return, money flows out
and into equities, real estate and commodities," Snowling said. If interest
rates remain low and inflation remains high, the outflows of cash from money
markets should continue to grow, he added.
As equities markets tumbled during the first quarter and credit markets
remained unstable, customers poured cash into money market accounts. Inflows
into money market accounts increased each week in the first 12 weeks of this
year, according to Money Fund Report. During those weeks, total cash in money
market accounts rose 10 percent to a peak of $3.46 trillion, according to Money
Fund Report.
In the first three months of the year as cash was funneled into money market
accounts, the Dow Jones Industrials average fell nearly 8 percent, while the
Standard & Poor's 500 index tumbled 10 percent.
Three of the last five weeks -- through the week ended April 29 -- have seen
a decline in total cash in money market accounts; it's now 1.2 percent lower
than it was when it peaked earlier in the year, falling to $3.416 trillion,
according to Money Fund Report.
Since cash started flowing out at the beginning of the second quarter, the
Dow Jones Industrials average has increased 6 percent, while the S&P 500 has
gained about 7 percent.
Which companies are expected to profit from the outflows is still up in the
air, Snowling said, as it hinges on what types of products and markets customers
prefer to enter.
Regardless of product type, if investment managers can keep the business
within their company, profitability for investment managers will improve,
Snowling said.
Generally, fees gained on money market accounts are much smaller than fees
on fixed income or equity products, Snowling said. The higher margin products
would help profitability, he said.
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