Investors are expecting a more volatile and less liquid period, the latest fund flow data suggests. In the wake of September’s liability-driven investment (LDI) crisis, money market funds reported strong inflows as they built up their cash buffers, according to Lipper Refinitiv. During October, more than €125.2bn (£109.5bn) was invested in such funds.
This trend has also been picked up by the European Fund and Asset Management Association (Efama), which registered €124bn (£108.5bn) in inflows into money market funds during that month. Throughout the period, long-term Ucits funds reported €53bn (£46bn) in outflows across equities, bonds and multi-asset funds, Efama reports. The trend towards liquid assets suggests that UK institutional investors, in particular, are building up cash reserves in anticipation of further margin calls on their derivative positions.
Inflows into money market funds reversed slightly in December as investors moved close to £7bn out of money market funds, but they remain risk-on as UK equity funds continue to report outflows.
This shift comes as yields on long-dated government bonds have stabilised since September’s turmoil. By the end of January, the yield on 30-year gilts stood at 3.8%, compared to its 4.99% peak in September.
The outlook for the pound has also improved. Deutsche Bank, which just four months ago described Britain as a quasi- emerging market, now predicts the pound to stabilise to £1.28 against the dollar by the end of the year, a factor which could help bolster the relative size of investors’ currency reserves.
But caution is not limited to the UK. In the US, institutional investors are sitting on more than $3trn (£2.4trn) of money market assets. This has helped to make such funds worth $4.8trn (£3.88trn), the highest level since the outbreak of the Covid pandemic in Spring 2020, according to the Investment Company Institute.
This suggests that while British investors might have gained some reprieve from the liquidity strains of last year’s bond market crisis, they are bracing themselves for a more volatile, less liquid market environment as central banks embark on monetary tightening.
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