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Follow the leader

Money market funds reflect rate hikes.

Published November 18 2022
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Video Transcript
00:00
Question: Why is cash a leading asset class right now?
00:08
Deborah Cunningham: Money market funds as they are designed and as they're positioned, are very short-term products on the fixed income side. As such, they reflect short term interest rate changes very, very quickly. So as interest rates at the federal level have gone from zero to over three 3%, they are now reflecting those same sorts of levels within money market funds. Generally speaking, when the Fed raises interest rates, you'll see money market funds raise in a similar manner, 25 basis points, 50 basis points, 75 basis points, reflective of the Fed moves within something that is a day to a month, depending upon the weighted average maturity of those products. So they're market based products, owning market securities that reflect market interest rates.
01:04
Question: How do money market funds react to rate increases compared to deposit products?
01:09
Deborah Cunningham: Deposit products reflect the administered rate of that particular banking institution. But in all instances, it generally follows a directional change for short term interest rates. That deposit beta is only historically about 40%. That means that for every 100 basis points of short-term rate increases that you see in the market, in the short-term rates market, you're only going to see 40 basis points of that reflected in a deposit product, versus a money market fund that is going to, with a short lag, reflect all 100 basis points. So that's the basic difference, and that's why in a steady to a rising rate environment, like we have been in over the course of a year now at this point, we basically are going to see something that is reflective of where short-term interest rates are and how quickly they're changing in a money market fund.
Tags Liquidity . Markets/Economy . Monetary Policy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bank accounts and CDs, unlike money market funds, are FDIC insured and offer stable principal.

Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations.

Diversification does not assure a profit nor protect against loss.

An investment in money market funds is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although some money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these funds.

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