Interest rates are falling but money market funds still in demand

Money market funds seem to be defying gravity. They are paying less in interest to investors but becoming more popular.

- Jeff Sommer

ILLUSTRATION: PETER AND MARIA HOEY/NYTIMES

Given a choice, people usually want more for their money, not less. Yet since the US Federal Reserve began pushing short-term interest rates down more than a year ago, investors have been funnelling hundreds of billions of additional dollars into these funds.

That may seem strange, but there are good reasons for it. Thanks to a combination of convenience, good returns and favourable comparisons with alternatives, money market funds are likely to continue attracting enormous wads of cash, even though the Fed announced on Oct 29 that it was lowering short-term interest rates by a quarter of a percentage point.

Big money market funds have been paying more than 4 per cent annualised interest, according to Crane Data, an independent financial market research firm. Within the next several weeks, these funds are almost certain to offer about a quarter of a percentage point less. But Mr Peter G. Crane, a founder of Crane Data, is quite confident that their appeal will be undiminished.

“I expect about US$100 billion (S$130 billion) to pour into money market funds each month for the rest of the year,” he said. “That’s very likely to happen, even though rates are going lower.”

Money market funds are still a good deal even if they are no longer paying more than 5 per cent interest as many of the biggest funds did through much of last year.