The amount of cash invested in money market mutual funds rose again last week to the surprise of many analysts who had expected the booming stock market would begin to siphon capital from them.
For the week ending Aug. 25, money fund assets rose by $3.74 billion to a total of $227.19 billion, according to the Investment Company Institute, the trade association for mutual funds. During the previous week, the gain was $3.4 billion. It was the eighth consecutive weekly increase.
Funds for institutional investors rose by $1.74 billion, compared with $1.5 billion the previous week. Broker-dealer funds showed a similar pattern, rising more this week than last.
Only the general purpose funds -- which include investments by individuals -- showed a slower rate of increase, growing by $343 million, compared with $621 million in the week ending Aug. 18.
An ICI spokesman said the growth of money market funds shows that these are the best investment when interest rates are declining, because rates paid by the funds tend to lag behind other interest rates.
Although the average money market fund yield fell almost a full percentage point last week, from 11.38 to 10.39 percent, according to Donaghue's Money Fund Report, yields were still higher than on Treasury securities. Last week the equivalent yields on six month and one year Treasury bills were 8.89 and 9.95 percent respectively.
"I didn't think they'll plunge, but I'm surprised they're still going up," said Harvey Glassman, first vice president of Shearson/American Express. The conventional Wall Street wisdom is that money market funds are just temporary holding devices for investors waiting to jump into the stock markets. Glassman said there is a growing belief among brokers that money market funds have become a standard investment and will hold up regardless of the stock market.
Shearson's money market fund showed a slightly larger increase after the Aug. 16 breakout of the stock market than in the days before. Its money fund investing only in government securities showed a substantially larger increase, indicating investors are seeking the safety of government investments.
Compared with money market funds, however, Shearson's bond funds increased noticeably more after Aug. 16. Its high yield, medium grade bond fund grew twice as fast, and increases in its municipal bond fund were two and a half times greater after Aug. 16 than in the same period before.
The higher activity indicates a desire on the part of investors to lock in higher yields. But since the money for the bond funds is not coming out of the money market funds, Glassman concluded it must be coming out of "shoeboxes and mattresses."
The same phenomenon occurred at Merrill Lynch. While its money market funds increased more rapidly after Aug 16., so did its fixed income and equity funds. Taxable and municipal bond funds showed a growth of $10 million in the first half of August and $48 million since. Its stock funds actually decreased by $7 million before Aug. 16 and then gained $34 million or 11 percent the next week.
The Fidelity group of funds reported a rapid acceleration, especially in municipal bond funds.
T. Rowe Price's Prime Reserve money market fund actually registered a $2 million decline after climbing by $41 million the previous week. Most of the action this week was in its aggressive growth fund. There was also a trend toward its corporate bond fund, which had sales of $20 million versus $.3 million the previous week. Its tax-free bond fund rose by $8.5 million compared with a net loss of $4 million before Aug. 16.
In addition to the desire to lock up interest rates, the flight to quality also continued. Capital Preservation, whose funds are composed solely of Treasury securities, experienced its best day on record Wednesday, gaining $37 million.
In the week following Aug. 16, investors put $63 million into its Treasury securities/no repos fund as the yield was falling from 10.25 to 9.89 percent.
On the other hand, the Calvert Group reported little measurable effect of decreasing interest rates. Its government-only money market fund rose less in the week after Aug. 16 than it did before then. And its municipal bond fund showed a slight decline.