Money Market Funds Reach Record Highs Due to High Yields and Bank Failures
Investors in the US have been flocking to money market funds this year, with assets reaching a record high of almost $5.4tn as of Wednesday, according to data from the Investment Company Institute. The surge in interest has been driven by high yields, particularly in government vehicles, as a result of the Federal Reserve’s aggressive interest rate rises, making these vehicles an attractive low-risk investment option.
Most of the assets in the ICI report are government-focused vehicles, which hold Treasury bills that are considered very low risk. Further data from EPFR shows that money market funds have absorbed approximately $146bn in May alone, putting the month on track to have the second-highest inflows since April 2020.
The early May collapse of First Republic Bank has also played a role in the rapid inflows into money market funds early this month. Total net assets in these funds have risen from less than $5.3tn in late April and $4.8tn at the beginning of the year.
Here are some key takeaways from the report:
- Money market funds in the US have reached a record high of almost $5.4tn in assets as of Wednesday.
- The surge in interest has been driven by high yields, particularly in government vehicles, as a result of the Federal Reserve’s aggressive interest rate rises.
- Most of the assets in the ICI report are government-focused vehicles, which hold Treasury bills that are considered very low risk.
- Money market funds have absorbed approximately $146bn in May alone, putting the month on track to have the second-highest inflows since April 2020.
- The early May collapse of First Republic Bank has played a role in the rapid inflows into money market funds early this month.
- The starring role of money market funds in markets this year may continue even after any deal to raise the federal borrowing limit.
- Money market funds, with high volumes of cash to deploy, could step in to replenish the Treasury department’s coffers after a potential resolution.
The flood of cash into money market funds has continued even as pressure on the banking system has eased and attention has turned to the prospects of a US government default if lawmakers in Washington fail to reach a deal to raise the country’s debt ceiling. Despite this, money market funds are likely to continue playing a major role in the markets throughout the rest of the year.
After any deal to raise the federal borrowing limit, the Treasury department is expected to have to borrow vast amounts of cash in order to replenish its coffers. This would require roughly $750bn in Treasury bills in the four months after a deal, according to JPMorgan estimates. A wave of issuance like that could potentially increase strains on banks and lift funding costs, but money market funds, with high volumes of cash to deploy, could step in and provide liquidity.
“To the extent that Treasury has a flood of supply that’s coming to market, it will be received with open arms,” said Deborah Cunningham, chief investment officer of global liquidity markets at Federated Hermes.
In conclusion, the surge in assets in money market funds in the US has been driven by high yields and bank failures. Money market funds are expected to continue playing a major role in the markets throughout the rest of the year, providing liquidity to help replenish the Treasury department’s coffers.
Main Keyword: Money Market Funds
LSI Keyword: Federal Reserve, Treasury Bills, Low-Risk Investment