After years of negative interest rates and rock-bottom returns, money market funds gained 3.87% over one year as of April 24, 2024, according to Morningstar. These products invested in very short-term debt securities took full advantage of the increase in key rates by the European Central Bank (ECB) until September 2023.
In addition, the category has benefited for almost a year from the inversion of the yield curve: “Very short-term interest rates are higher than long-term ones, which encourages investors to position themselves massively towards monetary products, which are both risk-free and better remunerated”, notes Thibault Malin, monetary investment specialist at BNP Paribas Asset Management. The category thus collected 51 billion euros in Europe in 2023, according to Morningstar.
Money market funds therefore find a place of choice in the range of cash investments, dominated by savings accounts, the Livret A in particular, unbeatable at 3% exempt from tax and social security contributions. “Monetary products are remunerated on a daily basis, and the investor can exit at any time without penalty,” recalls Thibault Malin. Conversely, passbooks are remunerated fortnightly, and term accounts are blocked on a deadline fixed in advance. These advantages persist, but the context is less favorable.
“The situation remains volatile”
The year 2024 should in fact mark the end of the status quo on key rates in force since September 2023, since inflation is now on the way to normalization, at 2.4% over one year. “The market currently anticipates three key rate cuts by the end of the year, which would increase the deposit rate from 4% to 3.25%, but the situation remains volatile,” estimates Thomas Prince, director of bond management at Groupama Asset Management.
However, the return on money market funds is directly linked to that of the €ster index (pronounced “ester”), an overnight rate whose level is generally 0.10 points below the deposit rate of the ECB. The €ster therefore reaches 3.90% today and could fall towards 3.10% by the end of the year, mechanically weighing on the performance of monetary funds.
In this case, should we exit this asset class? “No, because the reduction in key rates will be very gradual”, Judge Thomas Prince. “We must finance the energy, demographic and geopolitical transitions, which contributes to creating inflation, and calls for a regime of sustainably high key rates”. Money market funds could therefore achieve a performance this year close to that of 2023, at 3.5% on average.
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