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Investors poured a record $300 billion into money-market funds in just 3 weeks. Here’s what they are, and why they’re surging in popularity.

  • Investors are pouring cash into money-market funds after SVB’s collapse rattled confidence in banks.
  • Assets in money-market funds reached a fresh high of $5.2 trillion on March 29. 
  • Here’s what money-market funds are, and why they’ve surged in popularity in recent weeks.

The biggest bank collapse since the 2008 financial crisis has triggered an exodus among the fearful: US depositors migrating their cash into money-market funds. 

In just three weeks through March 29, a record $304 billion has flowed into money-market funds, boosting the total assets managed by such funds to a fresh high of $5.2 trillion, according to data published by the Investment Company Institute.

The shift kicked off after the collapse of Silicon Valley Bank (SVB) and Signature Bank in early March. Depositors freaked out over the safety of their savings and began yanking their money from smaller, more vulnerable lenders. 

Larger players on Wall Street have benefited from the money moves since SVB imploded: $52 billion went to Goldman Sachs, $46 billion to JPMorgan, and $37 billion to Fidelity.

Given their sudden popularity, it’s worth explaining what money-market funds are, and why they’re proving an irresistible place for depositors to stash their cash instead of banks.

What are money-market funds? 

A money-market fund is a mutual fund offered by investment companies and financial-services firms. It is a low-risk investment that offers investors a slightly higher return than cash based on the interest from the short-term debt securities it holds, including Treasury bills and repurchase agreements. 

In judging money-market funds, investors typically look for ones that offer a positive yield combined with a low expense ratio. An expense ratio is a fixed fee that mutual funds charge investors to cover operating costs. 

According to Bankrate, the money-market funds offering the highest yields as of March 31 are UFB Direct, CFG Community Bank, and CIT Bank. 

Why are people parking their cash in money-market funds?

It’s largely thanks to contagion fears that smaller banks will suffer a similar fate to SVB. Investors have rushed to move their money to a place they perceive as safer.

The Federal Reserve has also lifted it benchmark interest rates to as high as 5% compared to almost zero 12 months ago – the steepest jump in US borrowing costs since the 1980s. That has boosted money-market yields, meaning investors can get a higher return on such funds versus storing their cash in banks, which have been slow to increase savings rates in line with the Fed. 

One-year US Treasury yields have surged almost 12-fold since the end of 2021 to around 4.66% currently.

“We think that depositors have just awoken to their ability to earn more yield in a money-market fund with potentially less risk. After all, and unlike banks, money funds’ assets are very short, so they are subject to far less interest rate risk in a Fed tightening cycle,” Barclays strategist Joseph Abate said, per Bloomberg

What does the flow of cash to money-market funds mean for the economy? 

If money-market funds continue to be more attractive investments for savers than bank deposits, it could lead to a pullback in lending among smaller banks. 

“Banks are losing deposits by the buckets, and they don’t get it as they continue to advertise 0%! And now we have the first evidence of pulling back on lending. … the definition of a credit crunch,” markets guru Jim Bianco warned in a tweet on Sunday. 

According to Bloomberg, outflows from bank deposits have increased to $17.5 trillion through March 15, and have reached $5.4 trillion at smaller banks. 

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