The steady flow of funds into money-market funds has been a notable trend in recent times. However, as the Federal Reserve continues to lower interest rates, there is a significant likelihood that this pattern will undergo a reversal. Apollo Global Management's chief economist, Torsten Slok, believes that investors will be motivated to shift their cash into higher-yielding assets.

Why the Shift? Insights from Torsten Slok

In a note to clients on Tuesday, Slok pointed out the significant inflow to money-market funds since the Fed began raising rates in March 2022. He questioned where the $2 trillion added to these accounts would go now that the Fed is cutting rates. His most likely scenario is that money will leave money market accounts and flow into higher-yielding assets such as credit, including investment grade private credit.Even though investors have been continuously piling into money-market funds, Slok has remained steadfast in his prediction. The assets of such funds swelled to $7 trillion last week, defying expectations that investors would withdraw cash once the Fed started reducing interest rates from a more than two-decade high.The persistence of inflows even after the Fed's recent rate cuts likely indicates that money-market funds are slower than banks in reducing payouts to investors. As of November 18, the seven-day yield on the Crane 100 Money Fund Index, which tracks the 100 largest funds, was 4.46%, just below the lower bound of the federal funds rate.Moreover, money-market funds are attractive to institutions and corporate treasurers. When interest rates are high, they tend to outsource cash management rather than handle it themselves.This shift in the financial landscape has significant implications for investors and the overall economy. As rates continue to fluctuate, it will be crucial for market participants to closely monitor these trends and make informed decisions.