Investors move to money market funds

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Short-term safety

For the first year since 2001, investors moved back into money market mutual funds in 2005, with net sales of $127 billion.

See: Federal Reserve flow of funds account F 206.

The largest flows into money market funds came from US households ($47.7 billion) and funding corporations ($58.4 billion).

The return of investors to money market funds was clearly the result of the Federal Reserve policy of increasing short-term interest rates, combined with the flattening of the yield curve due to buying pressure on longer-term fixed income securities resulting from the trade deficit.

Investment by funding corporations picked up in the last quarter of 2005 to an annual rate of $168.6 billion.

Much of the money of funding corporations is connected to cash collateral held on short-sales of securities.

Presumably, collateral put up by speculators against long-bonds (gambling that long-bond prices would fall) was being channeled through funding corporations into money market funds, thereby helping to keep short-term rates down.