Money funds yielding nothing is being written about these days as there seems to be some surprise to the notion of stubborn low yields despite the rise in stocks since March. It should not be a shock that most of the profits from yields are being spent on expenses by the fund managers since little profit margin is left after the returns in Treasuries, the generating instrument of the money fund investments. Further, despite the draw down in money funds over the last couple months, there is still about 500 billion more in balances than there was in 2008.
Low yields and a 'creeping out of the storm cellar' have contributed to the rally in stocks as re-investing occurs. This along with substantial foreign purchases has put a bid in the markets. However, there is clearly a reluctance to chase perceived price discount value opportunities aggressively, leaving continued large balances in money funds. Ultimately this will limit upside momentum but does not eliminate the creeping bid side necessarily.
Though money funds are just a part of the investment environment, they do reveal the problems for the bulls. How does the market move substantially higher in a dramatically altered world on attitudes of acceptable risk? One where a primary sector for leverage, real estate, has been substantially reduced and may not return as a contributor for years. What is the substitute? Job growth? No. New risk opportunities based on cheap stocks? Not likely once the major indexes claim a 50% retracement from the March 09 / Oct O7 range,(which the Nasdaq100 futures completed today). No, the low fruit has been picked since March and now the real search for opportunity will begin.
