The popularity of money market funds has steadily climbed since earlier this year as consumers sought shelter from the stormy stock and bond markets.
Indeed, total assets in money market funds hit an all-time high of $624.65 billion in the week ended Nov. 9, before retrenching slightly in the following week, according to the Investment Company Institute.
Despite the decline to $623.7 billion as of Nov. 16, industry analysts expect money fund assets to grow even higher in response to the latest round of interest rate hikes.
Money market funds have continued to be a favorite among investors, despite several highly publicized bailouts. In recent months, some banks and fund managers have poured tens of millions of dollars into money market funds to cover losses from risky derivative investments.
Consumers now prefer money market funds to underperforming stock and bond funds, said Eli Neusner, a consultant at Cerulli Associates, a mutual fund tracking firm in Boston.
"You've seen people camp their money in these [money market] funds, riding out the volatility in the markets," Mr. Neusner said.
Walter Frank, chief economist for the Money. Fund Report, a publication of IBC/Donoghue, Ashland, Mass., expects that banks will start offering money market funds yielding as high as 6% within the next 30 days.
The resurgent popularity of these funds is simple, he said.
"As far as liquidity, these funds have always been the best game in town and now you're getting the yield," said Mr. Frank.
One Midwest bank has seen people lining up to open money market accounts and is gearing up to battle for more deposit dollars.
"We were anticipating the Fed move," to raise interest rates, said B. Randolph Bateman, senior vice president of the trust investment department for Cincinnati's Star Bank.
"We've shifted a lot of marketing, resources to money market funds," he said.
The Federal Reserve's 75 basis-point interest rate hike last week has already pushed banks to raise their own yields on deposits.
Mr. Bateman now expects the competition to heat up even more. Star is considering offering a money market product with a rate as high as 6.25%, he added.
"Not as attractive as the 9, 10, and 11% people have seen in the past, but certainly better than the 3s and 4s they've had lately," Mr. Bateman said.
Industry executives expect that assets in money market funds will continue to climb.
Mark Zandi, chief economist for Regional Financial Associates, Westchester, Pa., said conditions may even be ripe for an exodus away from the stock and bond markets and into insured deposits products.
"I think if we see a dramatic drop in stock prices it might spark significant growth in the [money market] funds," Mr. Zandi said.