Assets in U.S. money market funds surged to record highs this week, the best yields in years and the collapse of First Republic Bank in early May sent investors piling into lower-risk instruments.
Money market funds invested in high-quality, short-term debt had total net assets of nearly $5.4 trillion as of Wednesday, according to the Investment Company Institute. That was up from just under $5.3 trillion at the end of April and $4.8 trillion at the start of the year.
Investors have piled into money market funds this year as they offer increasingly higher yields, especially driven by the Federal Reserve’s most aggressive rate-hiking campaign in decades.
Most of the assets reported by ICI are in government-focused vehicles that hold Treasury bills that are considered to be very low risk.
Money market funds have absorbed some $146 billion so far in May, according to EPFR, another data provider, putting inflows for the month on track for the second-highest since April 2020, when panicked investors They poured in.
In March, money market funds took in a whopping $370 billion as regional Silicon Valley Bank and Signature Bank collapsed, raising questions about the health of the broader industry.
For Shelly Antoniewicz, senior economist at ICI, the rapid inflows into money market funds earlier this month may have something to do with the collapse of California-based First Republic, which had $93.5 billion in deposits before closing, most in early May. .
While pressure on the banking system has eased and attention has turned to the prospect of a U.S. government default if lawmakers in Washington fail to reach a deal to raise the country’s debt ceiling, the flood of cash continues to flow into money market funds. Prices for notes maturing at a time when the U.S. is expected to run out of cash have plummeted, yielding more than 7%.
Even after any agreement to increase federal borrowing limits, money market funds will likely continue to dominate the market this year. After a possible resolution is reached, the Treasury is expected to have to borrow vast amounts of cash to replenish coffers — about $750 billion in U.S. Treasuries in the four months following the deal, according to JPMorgan Chase & Co. estimates.
A wave of issuance like this will soak up market liquidity, potentially increasing pressure on banks and raising funding costs. But money market funds with plenty of cash to deploy could step in.
“As far as the Treasury has a lot of supply coming into the market, people are going to take it with open arms,” said Deborah Cunningham, chief investment officer at Federated Hermes Global Liquidity Markets.