Money Market Magnet Attracts $5.2 Trillion

Money market fund assets ballooned to a new record over the last week, closely-watched data released on Thursday afternoon in the US showed.

Although America’s regional banking crisis appeared to abate this week, 4% (or more) on riskless, short-dated government paper and repos remained a highly attractive proposition to a nation of depositors suddenly aware both of foregone yield and bank failure risk, for lack of a more polite way to put it.

Almost $66 billion flowed into money funds on net during the week to March 29, according to ICI. It was the third consecutive outsized weekly haul and the fourth in five.

On net, money market funds took in $377.69 billion over the last five weeks, taking total assets to almost $5.2 trillion.

Not surprisingly, prime funds bled another $8 billion, bringing the three-week exodus to $37 billion.

More than $71 billion flowed into government funds, $59.9 billion from institutional and more than $11 billion on the retail side.

This isn’t complicated. The events of the past several weeks served as a clarion call. Suddenly, Americans were compelled to assess the safety of their bank deposits, and while doing so, they realized that government money market funds might be a better option for cash in excess of the FDIC insurance limit. On top of that, there’s a very hefty yield pickup.

“We expect flows into money funds to grow by several hundred billion dollars, heating up bank deposit competition,” Barclays said this week. A key consideration is where all the cash flowing into money funds ends up. If it stays in RRP, it’s not much use to the economy.

The money market magnet effect has the potential to put additional pressure on small- and midsize banks. It presages margin compression, and could very easily impact credit creation, as lenders scrutinize would-be borrowers more closely. Deposits at small banks dropped by a record $120 billion in the week following SVB’s collapse+.

I’m loath to quote Jeff Gundlach for the second time in a week given that (and I’ll be forgiven for saying this) his soundbites are pretty generic, but there are only so many ways to tell this simple story, and Jeff’s version is just as good as anyone else’s. “I think that a lot of people fell asleep with their [bank] account balances, not really realizing they were getting such low rates,” he told CNBC.

“Since it’s all over the newspapers now, and all over news programs, I wouldn’t be surprised at all to see deposits as a percentage of GDP fall fairly significantly as people wake up to the fact that they’re giving away 400bps by staying in the banks,” he added. “That’s going to be a liquidity concern.”


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6 thoughts on “Money Market Magnet Attracts $5.2 Trillion

  1. Another possibility- anyone who had money in a CD and was told that the early termination penalty was (say) $1,000- $2,000 but was not capable of calculating the increase in yield ( even after paying the early termination fees) that they would receive from moving deposits from a CD to a UST/bill, might have delayed (or still be delaying) the transfer of their deposits.

  2. I moved a good portion of my money into government T-Bills several months ago. I advised all of my friends about the rates, but I don’t think any of them followed my lead. There is a convenience factor. You have to set-up an account with Treasury Direct and transfer funds. There is also a $10,000 minimum purchase. Some folks are unfamiliar with the process, or simply don’t have that much sitting in their bank account above what they may feel they need to keep readily accessible. Ideally, it would take $20-30,000 to build a simple bond ladder for yourself. I bought two eight-week bills, and one four-week bill, and staggered them so one matures and renews every two-weeks.

      1. So basically in an unprecedented rates volatility environment concentration risk in money market funds is becoming very real. From our friends at JP Morgan:

        “Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk. Interest rate risk measures the impact of changes in rates on the securities held by money market funds.”

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