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When the Federal Reserve starts to raise rates, will institutional money-market funds remain the darlings of corporate treasurers? Institutional money-market funds were the most popular kid on the block in 2001 because they provided a cushion against declining short-term rates. Taxable institutional funds’ assets grew by about $354 billion last year, and money funds became the most popular investing tool for sweep accounts. But the funds’ tendency to lag interest-rate changes will be a liability once the Fed starts tightening, currently expected at its June meeting. “Once the Fed moves, the money will flow out” of money funds, says Peter Crane, vice president of iMoneyNet Inc., a Westborough, Mass., company that tracks money-market funds. “Certainly $100 billion to $200 billion of [last year's inflows] is relatively hot money.” In fact, Crane says he expects 2002 to be the first year of negative asset growth for institutional money funds since 1983.That may turn out to be true, but the attraction of money-market funds isn’t solely their yields, observers say. In an environment where credit quality is a big issue, the funds and their credit analysts offer an extra line of protection for corporate treasuries that don’t have the resources to do their own credit analysis. That dependence is likely to moderate outflows, experts note. Compared with past tightening cycles, “there’s going to be a much higher value placed on credit,” this time around, says Denis McGonigle, an executive vice president of SEI Investments, an Oaks, Pa.-based asset management company that offers money-market funds.
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