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Thibault Malin (BNP Paribas) : Money market funds have further to go 

The recent turn in the communication of the European Central Bank (ECB) postponed the market's anticipations for rate cuts. But is it a turning point for money market strategies? 

At the beginning of the year, market forecasts predicted five to six interest rate cuts of 25 basis points each. However, expectations have since been revised to three or four rate cuts, suggesting rates may stabilize near or slightly above 3% by year-end. Based on recent economic data and insights from the European Central Bank, we anticipate three 25 basis point rate cuts starting in June, deviating from the market consensus. During rising interest rate periods, Money Market Funds (MMFs) favor shorter durations, which remains viable even in falling rate environments due to an inverted yield curve. Acquiring fixed-rate securities with maturities over three months tends to harm MMF performance in such conditions. The yield on one-year fixed-rate securities provided by financially robust issuers is roughly 3.70%—this is 20 basis points beneath the ongoing money market rates, with the Euro-Short-Term-Rate (ESTR) being close to 3.90%. In comparison, the yield from the equivalent security with a variable rate tied to the ESTR approaches 4.20%, representing a noteworthy differential in performance contribution. 

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Additionally, a rate environment characterized by uncertainty leads to volatility in the portfolio's net asset value, impacted by mark-to-market valuation. Holding a variable rate instrument acts as a safeguard against unpredictable market rate expectations. Therefore, the preference for a variable rate approach in a declining rate scenario offers dual advantages. This stance is strengthened by our belief that interest rates will remain slightly higher for a longer period than projected. This strategic outlook supports the expectation of sustained attractive performance for MMFs in the coming quarters. 

Money Market Funds have benefited from significant inflows over the past couple o​f years, which money market strategy has been the most attractive to investors? 

Every strategy employed by Money Market Funds (MMFs), ranging from AAA-rated short-term to Standard MMFs, has experienced capital inflows. A key element that investors have increasingly deemed essential is the ESG (Environmental, Social, and Governance) factor. The investor appetite for liquidity funds that incorporate ESG criteria into their investment strategies has been significant, leading numerous funds to earn certifications such as Socially Responsible Investing (SRI) and Towards Sustainability. These certifications enhance the requirements for selecting sectors and issuers based on non-financial merits. At BNP Paribas Asset Management, all of our open-ended MMFs comply with Article 8 of the Sustainable Finance Disclosure Regulation (SFDR). Moreover, two have attained the SRI and Towards Sustainability certifications. These particular funds have been among the most successful in attracting capital inflows over the last four years. 


Do you believe that MMFs will experience redemptions when the rates fall? 

Corporate dividend distributions, which occur seasonally and account for a substantial proportion of Money Market Funds (MMFs) shareholders, may lead to expected withdrawals in the upcoming quarter. However, as long as the yield curve stays inverted, substantial outflows from MMFs are unlikely. Investors in pursuit of yield who might consider shifting to other asset classes for medium to long-term investments will probably await the actualization of multiple rate decreases. Furthermore, a significant portion of MMF liabilities are attributable to corporations with constraints on their cash and cash equivalents investment options. Thus, we anticipate that any redemption activity will not be substantial. Interest rates are projected to remain elevated in the ensuing years5. Under such conditions, MMFs are likely to continue being a favoured investment choice for many investors who have dealt with negative interest rates in the past. 


BNP PARIBAS ASSET MANAGEMENT Europe, “the investment management company”, is a simplified joint stock company with its registered office at 1 boulevard Haussmann 75009 Paris, France, RCS Paris 319 378 832, registered with the “Autorité des marchés financiers” under number GP 96002.  

This material is issued and has been prepared by the investment management company. 

This material is produced for information purposes only and does not constitute: 

1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract  or commitment whatsoever or 

2. investment advice. 

Opinions included in this material constitute the judgement of the investment management company at the time specified and may be subject to change without notice. The investment management company is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio. 

Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the financial instruments may have a significant effect on the results portrayed in this material. 

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