Assets in money market funds have been growing at an astounding pace over the past two years, rising 33%, or by $600 billion, to reach $2.4 trillion, the International Herald Tribune reports.The inverted yield curve has been driving their growth, as they offer higher returns that long-term bonds. The 100 largest money market funds, with holdings due to mature in about 30 days, yielded an average of 4.98%, according to Crane Data. By comparison, two-year Treasury notes are bearing 4.65%, and 10-year Treasury notes, not that much better, at 4.69%.
“The risk premium has reached a historic low everywhere,” said Jeremy Grantham, chairman of Grantham, Mayo, Van Otterloo. “Global credit is more extended and more complicated than ever before, so that no one is sure where all the increased risk has ended up.”
Some are already warning, however, that interest rates will be coming down, and with them, money market fund yields. Bill Gross of Pimco, for example, believes the Federal Reserve “will cut rates and cut them significantly over the next few years in order to reinvigorate an anemic U.S. economy.” One economist expects the Fed to cut the fed funds rate from 5.25%, where it is currently, to 3.75% by next March. That would bring money market fund yields down to around 3.5%.