Money is no longer a trash can. Assets invested in US money market funds hit a record $5 billion last week. Investors shaken by the collapse of three US banks and a crisis of confidence in smaller regional lenders have scrambled to find safe and liquid alternatives to park their assets.
About $120 billion was invested in U.S. money market funds in the week to March 15, according to the Investment Company Institute. This is the biggest weekly influx since April 2020.
A money market fund is a mutual fund that invests in short-term debt securities. Although not federally insured, they are generally considered an ultra-safe cash substitute.
But what goes in quickly can come out just as quickly. The importance of these instruments in the financial plumbing system has prompted the Federal Reserve to intervene twice in the past 15 years. New rules – targeting disorderly racing during times of market stress – are due to be unveiled in April.
The worst panic since the Great Financial Crisis is ravaging Western banks. This makes the results extremely unpredictable. But optimists believe that current inflows into money market funds carry less risk than in the past.
Past bouts of instability have centered on “blue chip” money market funds. These invest in commercial paper (short-term corporate debt), a key source of short-term funding for many US companies. Large and sudden withdrawals contributed to tensions in short-term funding markets.
But exposure to prime funds has declined. More than 82% of money market fund assets are now held by public funds, which only invest in treasury bills or government bonds. Investors poured nearly $145 billion into government money market funds and withdrew $18 billion from prime funds.
Another reason that should discourage investors from rushing out is the relatively high yields available on money market funds. These have been rising steadily since the Fed began raising interest rates last year. An index of the 100 largest money market funds run by Crane Data, which tracks the industry, shows yields have climbed to an average of 4.4%, from 0.02% at the start of 2022.
This remains below the pace of US inflation, which hit 6% in February. But these funds, absent an unreasonable rush, should still provide decent shelter for nervous capital.
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