Following the money market

Takeaways

Now that the Fed is easing again, the question is what will happen to the massive amount of assets that are held in money market accounts.
Yield sensitive investors may seek to move into dividend-oriented equity strategies or products, but that also equates to a move up the risk spectrum.
There is a case to be made that some flow might end up in the front-end (2y-to-5y) of the UST curve,¹ but we suspect that part of the curve is still vulnerable going forward.
For now, we expect those flows to remain ‘sticky’ – which favours outperformance of the ultra-short end of the curve. We are adding the BMO USD Cash Management ETF (Ticker: ZUCM) to our tactical portfolio.

As of September 17^th, the Investment Company Institute (or ICI) estimates that there is US$7.28trln parked in American money market funds. That is twice the number that were held in such funds at the end of 2019 (US$3.6trln).

The “doubling” in flow is the result of two primary drivers. First, it is likely that a decent portion of the Covid stimulus checks that went out to U.S. households found their way into savings and investment accounts that held short-term, liquid assets – including money market shares. Second (and more importantly), the Federal Reserve (Fed) ended up raising short-term policy rates to their highest level in a generation. That meant that the liquidity and capital preservation appeal of money market funds was also augmented by higher yields. Those yields were above 5% for much of 2023 and 2024 – two of the highest years on record for inward flows.

But with the Federal Open Market Committee (FOMC) re-starting its easing cycle, markets are now pricing in a terminal rate that is just below 3.00% in the next year. If the market is right, that will also mean lower yields for the ultra-short end and that money market funds will be reinvesting proceeds at lower rates. In theory, that should imply that yield-sensitive investors will look elsewhere and that inflows into money market funds may slow from here.

Where that marginal dollar will flow is the key. We understand there may be temptation to assume that dividend-focused equities should benefit but that also means a shift up in the risk spectrum for a lot of conservative investors. There is also a potential case to be made for a shift of that flow into the front-end of the US curve (2y-to-5y) which would mean an increase in duration risk for investors. However, there are two problems that we have with that view:

First, the 3m /5y part of the UST curve is still inverted.² Generally, this part of the curve should steepen as the Fed eases rates further from here (Chart 2) – which means that T-bill yields drop by more and funds that track those should outperform relative to those that track the 2y-5y part of the UST curve.

Second, as mentioned above, the market is already pricing the Fed to reach its terminal rate by the end of next year. That tilts the risk towards higher coupon yields from here given the still strong U.S. fundamental backdrop.

Chart 1 – Total U.S. Money Market Assets and the Fed Funds Rate

Chart 2 – The U.S. 3-month/5-year curve will usually steepen when the Fed eases

Both of those points tell us that the 2y-5y part of the curve is still more vulnerable to the fundamentals relative to T-bills.

As such, we don’t see a compelling case to be made for flows to migrate from money market funds to that part of the curve just yet. This could change if incoming U.S. data tells us that the situation in the labour sector is worse than originally thought and that markets have to reprice the Fed funds terminal rate lower. But we don’t think we’re there at this point.

Which leads us back to our question – where will that money flow if not towards money market assets? Unfortunately, there isn’t a clear answer to that just yet. Instead, it may still make sense for money market flows to remain sticky until there is a clearer sense of whether the markets need to reprice U.S. fundamentals.

Until then, we see a more compelling case for funds that track ultra-shorts to outperform. And to be sure, we’ve added an allocation to ZUCM to our tactical portfolio for that reason.

¹ The UST Curve, or U.S. Treasury Yield Curve, shows yields and the maturity dates of U.S. Treasury securities.

²The US 3m/5y curve is a spread between the US 3m T-bill and the US 5y yield.

Performance (%)

Ticker	Year-to-date	1-month	3-month	6-month	1-year	3-year	5-year	10-year	Since inception	Inception date
ZUCM	-1.77	-0.52	1.14	-3.08	6.40	-	-	-	5.81	09/27/2023

Source: Bloomberg, as of August 31, 2025.

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