Surprise! Money market funds attracted another $30 billion over the latest weekly reporting period, data released on Thursday afternoon showed.
The pace is decelerating, but the dynamic is the same. Last month’s financial sector drama put a spotlight on low-yielding bank deposits and, more to the point, the extent to which a choice between an uninsured deposit yielding next to nothing and riskless US government paper and repos yielding 4% or more, is no choice at all.
Over seven weeks since the beginning of last month, money market funds have hauled in almost $460 billion. Total assets are now on the cusp of eclipsing $5.3 trillion.
A large percentage of this cash ends up parked in the Fed’s RRP facility which, some argue, is now contributing to instability in the banking sector. The Fed obviously doesn’t agree with that characterization, but even if they did, their options for addressing it are limited and could have unintended consequences+.
Earlier this week, Goldman’s Praveen Korapaty said money market funds could see an additional $800 billion in inflows, and suggested rising bank deposit betas would only “partially impede” the flow. The RRP does, he remarked, have a “destabilizing aspect.”
Not surprisingly, the lion’s share of the latest weekly influx went to government funds, although prime funds did manage a second weekly inflow, perhaps speaking to the notion that the situation has stabilized.
Again: There’s really no good reason for keeping excess cash in uninsured bank deposits versus short-term government obligations.
Warren Buffett is obviously correct to say the odds of actual losses on deposits are negligible+, but if you think of the spread between government money fund yields and deposit yields as an opportunity cost, those keeping their cash parked at banks are in fact incurring sizable “losses.”
The other side of the “destabilizing” RRP argument is just that competition for funds is healthy, and if banks which choose to compete are then compelled to curtail lending or raise the cost of credit to borrowers, that’s a good thing in an economic environment where demand still outstrips supply.
The debate goes on.
I feel like a fool that back in 2022 I wasn’t following the TIPS tips. With inflation elevated and banks unwilling to provide yield it’s not just opportunity cost but simply preservation. Staying in cash (which was certainly safer than equities and everything else correlated) in 2022 (and 2023) still means losing future purchasing power.
The usual TIPS ETFs sucked in 2022 (see SCHP TIP VTIP).
Vanguard’s VAIPX fund returned distributions of 9.35% to me in ’22. Today it is running over 7%.
I would have to think that this crowding into MMFs is creating increased demand and therefore suppressing (artificially?) the front end of the curve. Recent rates/price action would seem to indicate that the “natural” rate of the 2-year would be higher if not for this dynamic. But as H says, where would you put your money ATM? Inverted 2-year/Fed Funds curve, truly unusual times.