Investors Poured $166 Billion Into Cash Funds in Just One Week. BofA Says They Aren’t Ready To Leave.

Investors poured $166.4 billion into money-market funds in the week ended on October 7, marking the largest weekly inflow since April 2020, as rising interest rates made cash increasingly attractive compared with stocks.

Bank of America strategist Michael Hartnett expects much of that money to remain in cash until the Federal Reserve begins a sustained period of significant interest-rate cuts, according to Bloomberg, which obtained details of his Friday research note.

Hartnett said large reductions in investors' cash holdings have historically coincided with substantial monetary easing rather than modest adjustments in interest rates. "No rate cuts, no cash cuts," the strategist wrote.

The latest figures showed that bonds also attracted significant investment, drawing $33.8 billion during the week. Equity funds received $12.4 billion over the same period.

The inflows came as investors faced higher bond yields, persistent inflation and expectations of further interest-rate increases in the United States.

Separate figures released Thursday by the Investment Company Institute showed that total U.S. money-market fund assets increased by $72.27 billion in the week ended October 7, reaching $7.96 trillion.

The figures cover U.S. money-market mutual funds and differ from the broader fund-flow data cited in Hartnett's report.

Government money-market funds accounted for most of the increase, with assets rising $61.15 billion to $6.56 trillion. Prime money-market funds added $4.11 billion, while tax-exempt funds recorded a $7.02 billion increase.

Institutional investors accounted for much of the weekly growth. Assets in institutional money-market funds rose $58.27 billion to $4.84 trillion, while retail fund assets increased $14.01 billion to $3.12 trillion.

Within government money-market funds, institutional holdings climbed $54.66 billion, compared with an increase of $6.49 billion in retail holdings.

The latest increase followed a decline of $45.45 billion in total money-market fund assets during the preceding week.

The surge in cash holdings follows the Federal Reserve's September decision to increase borrowing costs as policymakers continued their efforts to bring inflation under control.

The central bank raised its benchmark interest-rate target by a quarter of a percentage point on September 16, bringing the federal funds rate to a range of 3.75% to 4%.

The Federal Open Market Committee approved the increase unanimously, citing elevated inflation and continued strength in economic activity.

In its statement, the Fed said domestic spending remained resilient, productivity growth was strong and capital investment was robust. It also said employment gains had kept pace with the workforce, while the unemployment rate had changed little.

However, inflation remained above the central bank's 2% target, leading policymakers to increase rates.

The minutes of the September meeting, released October 7, showed that market expectations for the future path of interest rates had risen substantially ahead of the decision.

Fed officials were presented with financial market data showing increases in Treasury yields, market-based inflation expectations and equity prices during the period between meetings.

Bond markets were pricing in three additional U.S. interest-rate increases through July 2027, with the next increase expected at the Fed's December meeting, according to Bloomberg's reporting on Hartnett's note.

Higher interest rates have increased competition between equities and investments such as cash and bonds, which can offer returns without the same degree of exposure to stock-market fluctuations.

The Fed is scheduled to hold its next monetary policy meeting on October 27-28, followed by another meeting on December 8-9, according to its official calendar.

Hartnett also identified the November U.S. midterm elections as the most likely catalyst for a significant move in stock markets heading into 2027.