Bond Watch: interest in ‘cash-like’ bonds keeps rising
Sam Benstead breaks down the latest news affecting bond investors.
23rd August 2024 10:00
by Sam Benstead from interactive investor
Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.
Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.
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Money market investments surge
The Investment Association (IA), a trade body for the funds industry, found that money market funds saw net inflows of £1.2 billion (money both put in and taken out) in June, with the £1.5 billion inflow to Short Term Money Market making it the best-selling IA sector for the month.
This was ahead of the August Bank of England interest rate cut, as investors rushed to capture yields of a little above 5%.
Money market funds are used as a cash alternative within investment accounts. Fund managers invest in secure bonds maturing soon, often in as little as a month, as well as bank deposits and other liquid instruments that generate a return with very little risk.
Bloomberg reported that the amount of money invested in money markets is rising, reporting that so far in August more than $100 billion (£760 million) has been invested in money market funds in the United States, taking assets to a record $6.24 trillion.
But now that central banks are cutting interest rates, returns from money market funds are likely to fall. This is because they invest in short-term fixed income products, where rates are closely tied to interest rates. In contrast, longer-term bonds allow investor to lock in a fixed return for years, but bond prices will be more volatile.
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Popular money market funds on the ii platform include Royal London Short Term Money Market, L&G Cash Trust, abrdn Sterling Money Market and Fidelity Cash.
While assets into money market funds rose in June, fixed-income funds saw net retail outflows of £1.2 billion in June, according to the IA, which reduces the first-half inflow to just £58 million for the asset class.
Following a £440 million inflow to bond funds in Q1, investors pulled £382 million in Q2, the trade body reported.
This comes even as the outlook for bonds improves. The Federal Reserve is widely expected to cut interest rates in September, while the Bank of England has already made its first move.
Bonds generally react positively to interest rate cuts, as newly issued bonds will yield less. This increases the appeal of higher-yielding existing bonds, causing their prices to rise.
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