Cash is no longer waste. Assets invested in US money market funds hit a record $5tn last week. Investors rattled by the collapse of three US banks and a crisis of confidence in smaller regional lenders scrambled for safe, liquid options to park their assets.
About $120 billion flooded into US money market funds in the week to March 15, according to the Investment Company Institute. Which is the biggest weekly inflow since April 2020.
A money market fund is a mutual fund that invests in short-term debt. While they are not federally-insured, they are generally viewed as an ultra-safe cash alternative.
But what goes in fast, can come out fast. The importance of these tools in the financial plumbing system has prompted the Federal Reserve to step in twice in the past 15 years. New rules – Intended for random runs during periods of market stress – should be unveiled in April.
The worst panic since the Great Financial Crisis is tearing up Western banking. It makes the results highly unpredictable. But optimists believe that the current flow into money market funds is less risky than in the past.
Past bouts of volatility focused on “prime” money market funds. They invest in commercial paper (short-term corporate debt), which is the main source of short-term financing for many US companies. Sudden mass withdrawals contribute to stress in short-term funding markets.
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But the exposure of prime funds is decreasing. More than 82 percent of money fund assets are now in government funds, which invest only in Treasuries or government bonds. Investors poured about $145bn into government money market funds and took $18bn from prime funds.
Another reason that should discourage investors from rushing out: the relatively high returns available on money market funds. This has been a steady increase since the Fed started 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 risen to an average of 4.4 percent from 0.02 percent in early 2022.
That still lags the pace of US inflation, which hit 6 percent in February. But these funds, in the absence of an unreasonable flight from them, should still provide a suitable shelter for nervous capital.
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