As market volatility has eased, institutional investors are moving away from the safety of U.S. money market funds and moving back to more return-seeking investments.
Data from Morningstar Inc. show that investors are taking initial steps away from money market funds, with assets in U.S.-domiciled funds dropping to $4.6 trillion at end of June from $4.75 trillion at the end of May.
The trend is nascent. Money market balances remain higher than they were before the coronavirus pandemic took hold in the U.S. in mid-March. But industry sources said the decline shows that asset owners are growing more comfortable with risk. Meanwhile, money managers are waiving fees on their money market funds to maintain investors' yields above zero.
The largest institutional money market funds in the U.S. are offering a seven-day yield in the 0.24% to 0.35% range, according to data provider Crane Data LLC.
Assets invested in the U.S. money market funds were 6.9% higher at the end of June than as of March 31. Institutional investors had been parking cash in money market funds at the height of the pandemic in March and April. They were banking on these funds for their liquid nature combined with a safe-haven status.
Sources said now some investors could be concerned about the possibility of negative rates in the U.S. and in the U.K. later this year with some investors rotating into higher-yielding fixed-income investments.
Matthew Maleri, partner at Rocaton Investment Advisors LLC in Norwalk, Conn., said that in part the Federal Reserve's monetary policy response to the COVID-19 crisis could result in encouraging investors to move out on the risk curve. "With short-term interest rates expected to stay near zero for several years, further outflows from money market funds would not be unexpected," Mr. Maleri said.
Investors said they are watching whether negative rates on money market funds could emerge later this year and whether any shift in rates would alter their cash management preferences.
Interest rate cuts by the Fed have reduced the yield on short-duration assets, said Steve Esack, spokesman for the $59.1 billion Pennsylvania Public School Employees' Retirement System, Harrisburg.
"There currently is no support for negative interest rates on the Fed's Board of Governors," Mr. Esack said. "Still, the potential for negative interest rates is an issue that we are monitoring closely."
The pension fund has increased its exposure to Treasury bills as spreads on other strategies have been tightening significantly given the unprecedented accommodations by the Fed. Mr. Esack declined to specify the increase but said it was funded from the sale of money market funds. The pension fund's strategic allocation to cash is 6%.