Monday, July 13
Real yields have turned negative, which is changing the income investing game.
Inflation has surged past short-term yields. And yet, households kept pouring cash into money market funds in the first quarter.
The latest Federal Reserve data shows household money market fund balances stood at $5.21 trillion:
That figure is up by $89 billion from the prior quarter and by $626 billion year-over-year.
Since 2022’s first quarter, when the Fed started raising interest rates, money market account balances have roughly doubled. These funds have been earning around 3.5%, a little down from over 5% in 2024, before rate cuts started. Treasury bills, a close proxy for money market funds, are currently earning between 3.66% and 3.91%.
Inflation at the end of March was 3.5%, per the Fed’s preferred inflation gauge. But in late April and on through May, it jumped to 4.2%. However, money market funds still earned only about 3.5%.
Earlier this year in January and February, money market funds were still beating inflation, thus earning a positive real yield (the yield minus inflation). But that stopped in March, April, and May, when real yields hit -0.7%.
So, current yields are no longer attractive.
Daniel A. White is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Daniel A. White & Associates and CoreCap Advisors are separate and unaffiliated entities.