Money market funds were hot in 2023. Here's what to expect in 2024

Published Tue, Dec 26 20239:41 AM ESTUpdated Tue, Dec 26 202312:17 PM EST

Next year should be another good one for money market funds, even amid anticipated rate cuts by the Federal Reserve, experts predict. The assets became a favorite place for Americans to stash cash this year, thanks to their historic yields. The annualized seven-day yield on the Crane 100 list of the 100 largest taxable money funds is currently 5.19%. It was 4.05% on Dec. 31, 2022, and 0.17% on Dec. 31, 2021, according to Crane Data, a firm that tracks money markets. Inflows ramped up as well. An estimated $950 billion has gone into money market funds so far this year, bringing the total net assets to $5.87 trillion as of Dec. 20, according to the Investment Company Institute . The Federal Reserve has indicated three rate cuts for 2024, which means the yields in short-term assets like money market funds and online savings accounts will follow suit. While it's unclear when those cuts may start, fed funds futures pricing data suggests about a 76% probability that rates will decrease by 25 basis points in March, according to the CME FedWatch Tool . "Even if the Fed is going to ease, it is going to be very measured, very controlled," said Shelly Antoniewicz, deputy chief economist at the Investment Company Institute. "Short-term yields may be a little lower, but will remain very attractive." Peter Crane, founder of Crane Data, expects yields to go down at most to 4% by the end of 2024. "With lower inflation rates, that is not exactly a bad deal," he said. He anticipates retail money will continue to flow into the funds, even though some may drift back to the stock and bond markets. That's because money market funds are competing with bank savings accounts for cash, not necessarily equities and fixed income assets, he said. "Even if the Fed cuts a number of times, the spread between bank deposit yields and money market funds yield will still be huge," Crane said. "The table will still be tilted in favor of money funds over bank deposits." The funds that Crane tracks have seen inflows of $1.1 trillion this year, and he said it's not out of the realm of possibility that the funds could see another $1 trillion of inflows in 2024. Institutional money will also come in since there is generally a month or two lag between the rate cut and money market fund yields coming down, Crane said. When to consider locking in rates elsewhere Money market funds can generally be thought of as a place to store money for more imminent needs or for your emergency reserves, said Christine Benz, director of personal finance and retirement planning for Morningstar. "Think about your anticipated use for your cash," she said. "If you are holding it as a diversifying tool rather than expecting to have an imminent need for the funds, perhaps you can be a little more flexible as to what to hold and where." For those that are currently working, Benz suggests holding anywhere from six months to a year's worth of cash to cover living expenses in an emergency. Sole earners or older adults in specialized professions should consider having a larger buffer, she said. Also, those in retirement should have one to two years of liquidity reserves in their portfolio so they don't have to sell stocks or bonds to meet immediate needs, she added. Certified financial planner Cathy Curtis, founder and CEO of Curtis Financial Planning, would look at money market funds for cash you will need in six months or less. "An investor can lock in the current higher rates by buying CDs or U.S. Treasurys now with longer maturities," said Curtis, a member of the CNBC Financial Advisor Council . "[In fact,] 5% rates can be found on some issues that can be locked in for up to 6 months to two years. Beyond two years, rates are lower as the yield curve is still inverted." For those with a longer-term time horizon, she would consider dividend-paying stocks with good track records of raising dividends. In fact, investors sitting on too much cash could be missing out on better fixed income opportunities , BlackRock's iShares Investment Strategy warned in its 2024 outlook. The firm's analysis found that investors could be rewarded the most during a time when the Fed leaves rates unchanged. On average, bonds returned almost twice as much during a Fed pause than in the months following the first rate cut, Kristy Akullian, senior iShares investment strategist, said during a presentation of BlackRock's 2024 global outlook earlier this month. "Now is the time to get a little bit more active. Now is the time to take a little bit more risk in fixed income," she said. BlackRock suggests starting to extend duration, but not to the long end of the curve. It called the intermediate portion of the yield curve the "sweet spot."