Inflows to money market funds slowed in the week to May 10, but total assets nevertheless hit a new record at $5.33 trillion, data released on Thursday afternoon showed.
This is the same story week after week. Money market fund yields are highly attractive compared to most bank deposits (although you can get 4% from Tim Cook now), and government money funds are theoretically as safe as FDIC-insured savings accounts.
Headlines describing bank runs at regional lenders forced Americans to at least think about their deposits. Invariably, it occurred to some depositors that they could earn a higher yield without sacrificing their guarantee by migrating to government money market funds. Or so the story goes.
Although last week’s inflow was the smallest of the post-SVB era (excluding the drawdown during tax week), $18.33 billion still counted as a respectable haul. Around half of that went to funds backed by government paper and obligations, which took in $9.35 billion, split evenly between retail and institutional.
The unfortunate (if darkly ironic in this context) reality in 2023 is that the safety of both deposits and government money funds is predicated on the stability of a government which looks more willing to risk financial catastrophe every day. Partisanship is an obstacle to raising the FDIC insurance cap and it’s the obstacle to striking a deal to avert an unprecedented US default, which would impact T-Bills.
A recent Gallup poll found that around half of Americans are at least somewhat concerned about the safety of the money they have in US banks and another survey showed voters harbor serious reservations about the competency of the executive, the legislature, the Treasury and the Fed when it comes to handling the economy and, implicitly, coping with financial sector stress.
Speaking of stress in the financial sector, the weekly update on the Fed’s balance sheet showed discount window usage rose sharply to $9.32 billion, while BTFP borrowing hit a new record, at $83 billion.
I’d note that this release covers a period of renewed turmoil for some regionals, including PacWest, which said Thursday that deposits dropped more than 9% last week amid all manner of speculation about the lender’s fate.
Recall that outstanding loans from the Fed’s traditional backstop (the blue bars in the chart) showed a marked decrease the prior week, when First Republic’s borrowings migrated to the “other credit extensions” line after the bank was acquired by JPMorgan. The combined figure covering the discount window, BTFP and other credit extensions was mostly unchanged this week.
On Thursday, PacWest cited Bloomberg’s reporting in explaining recent deposit flight. “On the afternoon of May 3, PacWest was featured prominently in the financial news headlines [which] increased our customers’ fears of the safety of their deposits,” the bank said. Those headlines came just hours after Jerome Powell suggested the situation among America’s smaller lenders had stabilized.
“Our deposits declined approximately 9.5%, with a majority of that decline occurring on May 4 and May 5 after the news reports,” PacWest went on. They funded the outflow “with available on-balance sheet liquidity.” As of Wednesday, PacWest had $15 billion in immediately-available liquidity against $5.2 billion of uninsured deposits. The stock fell 22% Thursday.
