BofA: Bubble Expanding Into Money Market Funds As AUM Tops Record Of $5.1 Trillion

Money market funds will witness the next bubble as investors flee to cash and buy safe short-term Treasuries, Bank of America BAC investment strategist Michael Hartnett predicted in his latest 'The Flow Show'.

Assets under management in money market funds have now surged above $5.1 trillion, setting a new all-time high and recording inflows for more than $300 billion over the past month.  

In the previous six weeks, $29.3 billion has flowed into U.S. Treasuries, the greatest flow ever recorded, the expert said.

The iShares U.S. Treasury Bond ETF GOVT recorded $3.4 billion of inflows over the past month, posting the second-largest monthly inflow ever.

The last two significant increases in MMF AUM happened in 2008 and 2020, both of which were followed by aggressive Fed rate cuts. In 2008 MMF assets grew from $2.5 to $4 trillion and the Fed slashed rate from 5% to 0%. In 2020 MMF assets rose from $3.5 trillion to $5 trillion, and Fed funds fell from 2.5% to 0%.

What Will The Fed Do Next?

Fed swap market is pricing about 5% rate peak May, followed by a first 25bp cut in July and then 210bp rate cuts over the next 18 months. According to Hartnett, the Fed is quite likely to bring down rates aggressively during the next 12 months, but this only happens when payrolls begin to fall.

Historically, Fed cuts and yield curve steepening did not occur until a surge in initial jobless claims, the strategist noted.

Scores On The Door: Month-to-Date Performance of Treasury ETFs

Exchange traded funds investing in U.S. Treasury securities have experienced a marked rally in recent weeks. The iShares 20+ Year Treasury Bond ETF TLT is 6% higher month-to-date. The iShares 7-10 Year Treasury Bond ETF IEF rose 5.3% during the same period, while the iShares 1-3 Year Treasury Bond ETF SHY gained 2.2%.

Image by Gerd Altmann from Pixabay