Since early May, the 7-day annualized yield of Tianhong Yu'ebao has fallen below 1%, reaching 0.87% as of June 2nd. This translates to a daily return of approximately 0.24 yuan for every 10,000 yuan held. Back in January 2014, this yield once exceeded 6.7%, representing a decline of over 80% from its peak. Currently, no money market fund in the market offers a 7-day annualized yield above 2%.
In contrast to the declining yields, the scale of money market funds continues to climb steadily. By the end of March 2026, the total assets under management for money market funds across the market reached 15.58 trillion yuan, an increase of 2.25 trillion yuan or 16.91% year-on-year, making it one of the fastest-growing product categories. Among them, Tianhong Yu'ebao alone has assets exceeding 700 billion yuan, with the number of holders reaching 780 million.
Reasons for the Persistent Decline in "Baby Fund" Yields
Monetary Policy as a Key Driver
Currently, China's economy faces a complex domestic and international environment. The People's Bank of China continues to maintain a moderately accommodative monetary policy stance to ensure ample liquidity and lower overall financing costs. This policy orientation has directly led to a systemic decline in the central level of money market interest rates. Presently, the 7-day pledged repo rate for deposit-taking financial institutions (DR007) in the interbank market has fallen from around 1.69% a year ago to 1.36% on June 1st of this year. The 1-year government bond yield dropped from about 1.45% to 1.14%, and the 1-month AAA-rated interbank certificate of deposit yield decreased from approximately 1.67% to 1.33%. As significant participants in the money market, money market funds' yields directly reflect market funding costs and find it difficult to remain insulated from the broader macro interest rate environment.
From a transmission mechanism perspective, in March 2025, the People's Bank of China implemented a significant reform: it abolished the single-price auction mechanism for the Medium-term Lending Facility (MLF), replacing it with a multi-price auction system, and established the 7-day reverse repo rate as the sole core policy rate. This means the guidance path for short-term money market rates has shifted from the previous "dual-center" model—where the MLF rate served as the medium-term policy rate influencing loan rates via the Loan Prime Rate (LPR), while the DR007 followed the reverse repo rate—to a more direct and clear single anchor. The transmission now flows from the 7-day reverse repo rate to the DR007, and then to other market rates. This has enhanced the speed and efficiency of transmitting policy intentions to money market rates, laying an institutional foundation for the synchronized decline in market rates.
Asset-Side Pressures and Supply-Side Factors
Money market funds primarily invest in highly liquid assets such as bank deposits, interbank certificates of deposit, and short-term government bonds. The yields on these underlying assets are currently at historically low levels. As previously purchased higher-yielding assets mature, new investments can only be made at lower yields, creating a negative cycle of reinvestment at maturity. In the face of liquidity tightness, the actions of money market fund managers further reinforce the downward trend in yields. Managers often adopt defensive strategies, such as shortening portfolio duration and reducing leverage levels. While these measures enhance portfolio safety and liquidity, they also compress the potential for yield enhancement.
Regulatory Constraints
In November 2024, the China Banking Association issued the "Self-Regulatory Proposal on Optimizing the Self-Discipline Management of Non-Bank Interbank Deposit Rates." This initiative, for the first time, brought the interest rates on non-bank financial institutions' interbank demand deposits under industry self-regulation, stipulating that such rates should be priced with reference to the 7-day reverse repo rate. It also specified that for deposits allowing early withdrawal, the interest rate on the withdrawn portion should not exceed 0.35%, thereby reducing the space for money market funds to obtain high-interest income through negotiated deposits. In March 2026, the updated self-regulatory rules 2.0 were released, requiring major banks to limit the proportion of interbank demand deposits with interest rates exceeding 1.4% at quarter-end to between 10% and 20%. Simultaneously, the scope of self-regulation was expanded from non-bank interbank deposits to bank-to-bank interbank deposits, further blocking avenues for money market funds to access high-yield deposits within the banking system.
Continued Popularity Despite Falling Yields
Ongoing Trend of "Deposit Migration"
The appeal of money market funds stems from their relative advantages, not their absolute returns. Currently, with bank deposit rates continuously declining, the attractiveness of traditional savings is waning. The gap between the 1-year fixed deposit rates at major state-owned banks and money market fund yields is narrowing, even inverting in some cases, with demand deposit rates at the big four banks generally below 0.1%. Consequently, household idle funds are shifting from traditional bank deposits to more flexible cash management tools like money market funds. For many ordinary investors, funds placed in Yu'ebao are not intended for medium- to long-term investment but are rather daily consumption funds, short-term idle cash, and temporary reserves for immediate use. As long as money market fund yields remain above demand deposit rates, they retain practical appeal.
Furthermore, products like Yu'ebao have become deeply embedded in daily life. Many users treat Yu'ebao as an electronic wallet; its functionality extends beyond fund investment to include consumption, transfers, bill payments, and short-term fund storage. This scenario-based advantage creates strong customer stickiness. Therefore, even with declining yields, users may not immediately redeem their funds, and alternative products may not offer the same level of convenience.
Investor Risk Aversion
Against a backdrop of rising macroeconomic uncertainty and heightened volatility in capital markets, investor risk appetite has decreased. Consequently, significant amounts of capital have withdrawn from higher-volatility assets like equities and flowed into perceived "safe havens" such as money market funds. Historical data provides clearer validation of this logic. During periods of significantly rising market risk premiums, such as the third quarter of 2015 and the first quarter of 2020, the quarterly scale increase of money market funds exceeded 1 trillion yuan. Similarly, from 2023 to April 2024, when market risk premiums surged again, substantial funds flowed into money market funds.
Long-Term Economic Trends
From a long-term perspective, the process of declining interest rate centers driven by the deepening of economic transformation is not yet complete. As China's economy shifts from high-speed growth to high-quality development, accompanied by a change in growth models and a trend decline in the marginal return on capital, the financing costs for the real economy are also decreasing. This necessitates a corresponding adjustment in the center of the risk-free interest rate. As long as the environment of economic transformation and moderate growth persists, and to lower real economy financing costs and address potential deflationary pressures, the foundation for monetary policy to tighten rapidly and significantly remains weak. International experience corroborates this point. Whether during the zero-interest-rate phase in the US after the international financial crisis or the prolonged low-interest-rate cycle in the Eurozone, these periods were underpinned by macroeconomic backgrounds of weak economic growth or deflationary risks.
Of course, as market conditions evolve dynamically, we can monitor potential triggers for a reversal of this trend to assess whether the current low-interest-rate environment might change. First, an unexpectedly strong macroeconomic recovery leading to a substantive shift in monetary policy. If the domestic economy exhibits robust and sustainable endogenous growth momentum, corporate financing demand recovers noticeably alongside significantly rising inflationary pressures, then policy rates could potentially increase. Second, major adjustments in financial regulatory policy that release yield potential on the asset side. For instance, if future assessments of interbank deposit rate self-regulation are relaxed, or if money market funds are permitted to invest in slightly higher-risk asset classes with correspondingly higher returns, the sources of money market fund income could broaden. Third, changes in the liquidity landscape and an increase in the supply of high-quality assets. If new growth drivers like technological innovation and green industries give rise to a large number of issuers with good credit quality and appropriate maturities, increasing the supply of short-term financing instruments, this would improve the supply-demand relationship for assets available to money market funds for allocation.
Adjusting Asset Allocation for the Average Investor
For ordinary investors, navigating the new normal of persistently low yields requires a clear understanding of the nature of their funds and implementing a well-defined, layered allocation strategy.
First, investors should recognize that the core purpose of money market funds is to serve as a highly liquid cash management tool and a "stabilizer" within a personal investment portfolio. Their value lies in offering liquidity nearly equivalent to demand deposits while providing a yield slightly higher than that of demand deposits. Second, during periods of stock market turbulence or heightened bond market volatility, money market funds act as a "safe harbor" for funds, offering certain避险 value. Therefore, investors should allocate short-term idle cash, daily emergency reserves, funds earmarked for specific use within the next year, and transitional funds awaiting investment opportunities into money market funds like Yu'ebao to ensure safety and immediate accessibility.
For funds not needed within a year but not requiring immediate access, investors can appropriately compare tools such as short-term deposits, cash management wealth management products, reverse repo agreements on government bonds, and short-to-medium term bond funds. If the timing of fund usage is relatively certain, one can slightly "sacrifice" some liquidity to achieve a higher yield. However, it's important to note that higher yields typically come with liquidity constraints and potential net asset value fluctuations. For example, while short-to-medium term bond funds may offer higher long-term yields than money market funds, their net asset values can fluctuate. Similarly, bank wealth management products might offer slightly higher yields but may not guarantee immediate redemption.
For medium- to long-term savings goals with a 1-2 year horizon, or for funds where the investor has low risk tolerance but desires returns higher than those from money market funds, consider a portfolio combination of "money market funds + short-to-medium term bond funds + low-volatility fixed-income-plus products." In a low-interest-rate environment, appropriately allocating to short-to-medium term bond funds or low-volatility fixed-income products can help enhance portfolio returns.
For long-term funds not needed for 2-3 years or more, investors can gradually build awareness of equity asset allocation. The fact that Yu'ebao's yield has fallen below 1% reminds ordinary investors that cash-like assets primarily address liquidity needs but do not solve the problem of long-term wealth growth. For long-term investors with lower risk tolerance, considering allocations to dividend-yielding assets, such as low-volatility dividend index funds or high-dividend ETFs, is an option. For investors with moderate risk tolerance, broad-based index funds could be considered. For investors with stronger risk tolerance and some investment experience, further consideration could be given to regular investments in actively managed equity-biased funds or sector/thematic ETFs.
Simultaneously, investors must be cautious to avoid risk mismatches driven by yield anxiety. As yields on money market funds like Yu'ebao decline, many investors might be attracted to products promising higher returns, such as high-yield wealth management products, complex structured products, or even investment projects without full risk disclosure. It is crucial to understand that in a low-interest-rate environment, yields on genuinely safe assets are generally declining. If a product still claims returns significantly above market levels, investors must scrutinize the source of those returns, carefully judge whether they can bear the associated risks, and avoid taking on risks that do not match their personal capacity just to earn a little extra interest.
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