For the first year since 2001, investors moved back into money market mutual funds in 2005, with net sales of $127 billion. (See: Federal Reserve flow of funds account F206.)

The largest flows into money market funds came from U.S. households ($47.7 billion) and funding corporations ($58.4 billion).

The return of investors to money market funds was clearly the result of the Federal Reserve policy of increasing short-term interest rates, combined with the flattening of the yield curve due to buying pressure on longer-term fixed income securities resulting from the trade deficit.

Investment by funding corporations picked up in the last quarter of 2005 to an annual rate of $168.6 billion. Much of the money of funding corporations is connected to cash collateral held on short-sales of securities.

Presumably, collateral put up by speculators against long-bonds (gambling that long-bond prices would fall) was being channeled through funding corporations into money market funds, thereby helping to keep short-term rates down.

(See: “Just What Are Funding Corporations?“)

This entry was posted on Sunday, March 12th, 2006 at 12:56 pm and is filed under Corporate Bonds, Fund Shares, Individual Investors, Foreign Investors, Fund Managers. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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